HPQ vs. Autonomy – Non-starter

Mike Lynch will not be losing any sleep tonight.

• The news that both the FBI and the SFO (UK Serious Fraud Office) have opened investigations into alleged wilful accounting misrepresentations means nothing.
• The FBI opened its investigation in November 2012 while the SFO began investigating on February 6^th 2013 according to HPQ’s routine quarterly SEC filing.
• The important thing to remember here is that an investigation was always going to happen whether the case merits a prosecution or not.
• It is what is concluded from the investigation and whether the investigative agencies decide to follow up with a prosecution that really matters.
• Here, I continue to believe that HPQ is running the risk of ending up with egg all over its face
• Since the time of its accusations nothing has changed.
• HPQ has still not made clear how it is accusing the former management of Autonomy and the accused parties are still holding their ground.
• The problem here is likely to be one of legality.
• Mike Lynch and his crew may have used accounting to make Autonomy look better than it really was but the nature of accounting for software is very vague.
• Hence, while Autonomy may have flirted with the fringes of the law, I doubt that it actually broke it and this is what the fraud investigators will be looking for.
• There have been questions surrounding Autonomy’s accounting practices for years and despite constant and heavy criticism from the financial community, no one has been able to make anything stick.
• This is not Enron or Worldcom that appeared from out of the blue as people have been digging around in Autonomy’s accounts for years.
• Hence I suspect that the fraud offices will find questionable accounting practices but also conclude that they are not technically illegal.
• In order to proceed with a prosecution, there needs to be enough evidence for the agency to be reasonably confident of achieving a conviction.
• Otherwise, it is simply a waste of public money, which is a commodity in increasingly short supply.
• Therefore, I suspect that the investigative agencies will criticise Autonomy but decline to proceed with a prosecution.
• This will make HPQ look even more foolish than it already does for having written off most of Autonomy just 11 months after buying it but if we are lucky it will trigger a badly needed reshuffle at the top.
• Then, I can start to get interested in a recovery story and a new strategy.
• Until then the air will be full of flying eggs rather than the winds of change.