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HP and Autonomy: "When knowing what happened is not enough."

Posted By TelecomTV One , 26 November 2012 | 0 Comments | (1)
Tags: HP Autonomy Adobe Cisco Google Deloitte KPMG Mergers & Acquisitions Litigation Software Finance

And so, with the long Thanksgiving weekend now behind them, HP's execs look up from the bony but festive remains of one turkey into the rancid entrails of another looming over the troubled company. The HP/Autonomy debacle is back centre stage and, as Meg Whitman and Mike Lynch square up to one another, a protracted, nasty and bloody fight seems inevitable - and with no quarter likely to be given or taken the loser will kiss goodbye to his or her career. By Martyn Warwick.

Ms. Whitman and her cohorts now have no choice other than to continue to pursue their claims that the management of the UK software company Autonomy is guilty of "serious accounting improprieties" that were part of a "willful effort... to mislead investors."

HP bought Autonomy for US$10.2 billion in October 2011. Last week the company posted Q4 losses of $6.9 billion and blamed the mess on the $8.8 billion write-down it has been forced to make after overpaying massively for the British company.

HP's current CEO, Meg Whitman, says that through some accounting jiggery-pokery Autonomy falsely boosted its figures when HP was negotiating to buy it. However, HP did conduct due diligence on Autonomy and its expensive in-house lawyers and even more expensive external auditors (HP used both Deloitte and KPMG to audit Autonomy's books) failed to find anything amiss.

It is reported that the first Mike Lynch, Autonomy's co-founder and erstwhile CEO, knew of HP's claims was when he got an SMS message from a friend informing him of the write-down and that HP was blaming him personally for the mess and is alleging potential criminal actions.

Now, Mr. Lynch has a reputation for being something of a bad-tempered bruiser and has come out fighting. Unsurprisingly given his antecedents he is eschewing the niceties of conducting his defence via corporate emails and lawyers and is going for the throat. HP has been taken aback by the ferocity and directness of his response.

Meg Whitman dispensed with Mr. Lynch's services at HP in May this year and he says, “This has been a shock. The last time I talked to anyone there [HP] was in June, for about an hour.”

HP wanted Autonomy to give it a totemic presence in the pantheon of companies claiming to be able to provide "solutions' in the booming field of "Big Data". Hence the "at any costs by any means" purchase of Autonomy which has a raft of patented pattern-seeking algorithms. Before HP bought the company they were being put to use in more than 400 organisations around the globe - including the likes of Adobe, Cisco, Google - and (shock! horror! Whisper it not in Gath) even HP itself!

Mike Lynch says HP's claims are a poisonous mixture of sour grapes, losses, mismanagement, panic and the need to find a scapegoat to blame for major corporate failings. He says that once HP bought Autonomy, sales of its products instantly fell precipitately because of inter-departmental infighting and vicious corporate politicking. He adds, "They [HP] drove out the top 100 people from Autonomy, and a bunch of trainees were put in.

The HP salesforce actually got better commissions for selling our competitors’ products" while, he alleges, the HP top brass told him the company would not formally approve Autonomy’s software for use on its customers’ servers even though "it was already running on thousands of HP machines around the world."

He also says that "HP  has core structural problems" and believes that last week's write-down which sent HP's shares to their lowest levels in 10 years "is an attempt to set the bar so low that you can’t possibly fail.” HP's share price has collapsed by 75 per cent over the past two years and according to Mike Lynch, "HP is a company in chaos and I'm not going to be their scapegoat."

He avers: "The truth is that Autonomy, after due diligence, was bought for a full price by a CEO [the short-lived Leo Apotheker] who had a vision of building up his company's software business. Then HP had another of its regular coups d'etat and suddenly Autonomy no longer fitted into its flip-flopping strategy. The company has gone downhill fast. There is a genuine write-down here but it is because HP has messed up. There is no strategy, no vision. This was about infighting among divisions."

The big question in all this is how an organisation as big and rich and powerful as HP could conduct painstaking and far-reaching due diligence on a massive acquisition and them within a mere 13 months of completing it, be forced into a massive write-down? Surely it couldn't be because HP didn't use the data management and pattern regonition software that was the USP of the very company it was seeking to purchase?

No? Well, take a look at this. It is from an Autonomy white paper of 2008 called "“When Knowing What Happened Is Not Enough”   

"This year the market witnessed the dramatic and devastating impact of high-profile fraud cases. World-class financial institutions putting back the pieces of their organisations are asking themselves, “How can one trader, one market segment, expose us to such enormous risk? Why didn’t our risk management controls work?” In retrospect, the answer seems obvious: information silos, a lack of integrated governance processes and alert mechanisms across systems and departments created corporate blind spots. Senior management had no immediate visibility into the scope or depth of the risk."

i.e. "Caveat Emptor" the good old adage that HP, mired in bureaucracy, riven by internecine rivalries and plagued by continual reorganisations forced on it by a series of disastrous CEOs, seems to have ignored. Could it be that HP itself failed to exploit Autonomy's software capabilities - and panic ensued when it became evident that it had overpayed for an asset it doesn't know how to use properly? Wouldn't that be ironic?

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