HP vs. Autonomy – Last Laugh

Court decides what I have suspected all along

• Mike Lynch the ex-CEO of Autonomy has the last laugh in the 12-year battle over who was really to blame for HP’s calamitous acquisition of Autonomy which I have long believed was a result of HP’s incompetence and desperation as opposed to criminal activities by Mike Lynch and his team.
• In 2011, HP acquired UK software company Autonomy for $11.7bn and then 14 months later it wrote down the acquisition by $8.8bn (75%) claiming “serious accounting improprieties” and “outright misrepresentations”.
• HP then went on a 13-year legal crusade to blame the management of Autonomy for fraudulently inflating the value of the company claiming that HP’s management and its board were the honest victims of fraud.
• I have long viewed this as an effort to blame the staggering incompetence of HP’s board and its management on Autonomy because it was as clear as day that the company did not do its due diligence properly (see here to read my piece from 2012).
• The main reason for this view is that it in the two years that led up to the acquisition, I was working in investment banking where I covered Autonomy as a technology specialist in sales and trading which is the period that HP claims that the fraud took place.
• Autonomy’s detractors had been writing about Autonomy’s accounting for years and there had been the occasional sign that things were not quite right.
• The most common red flag was that cash flow in the quarterly reports often did not match profit which is quite unusual in a software company.
• The balance was often made up in subsequent quarters but critically, this and other issues caused people to wave the red flag.
• At the time it was clear to the market that Autonomy played fast and loose with the accounting rules, but this was more about smoothing the revenue over a year as opposed to fraudulently inflating the revenue numbers.
• The motivation for doing this would be to reduce the volatility in the share price as a result of the lumpier-than-normal fluctuations in revenue.
• To any reasonably prudent person, this would have made him doubly cautious when looking into the financial position of Autonomy.
• History has shown that a determined person can deceive a competent auditor without too much difficulty because it is simply not economical or timely to look under every single rock or pebble.
• In this case, there were more than enough red flags and so much money at stake to warrant a due diligence process that went beyond the audited figures.
• However, HP’s board and management were in such a rush to turn HP into a high-margin software company, that they decided to ignore the red flags and press ahead with the acquisition nonetheless and shareholders paid the price for it.
• To me, this said far more about HP than it did Autonomy and it is no surprise that a board and management clear-out followed in the subsequent months.
• To be fair to HP, it has had some success in prosecuting its claims in the civil court and Autonomy’s previous CFO has served 5 years after being found guilty of fraud, but I now wonder whether that conviction is safe.
• This is because Autonomy’s former VP Finance was also on trial with Lynch and was also found not guilty meaning that there is more to the defence other than Lynch being ignorant of the crime because he left these matters up to others as he testified.
• The net result is that this serves as a cautionary tale to any company panicking about being left behind or under pressure to make change with the message being that the due diligence process is there for a reason.