HP writes down $5bn after claims Autonomy misled it about its finances

21 November 2012

Hewlett-Packard (HP) has taken a $5bn hit on the value of Autonomy, the British technology firm it brought last year for more than $10bn (£7bn), over what it says are “serious accounting improprieties”. Ex-chief executive, Mike Lynch, who left the company in May after making £500m from the acquisition and who has often been described as the British Bill Gates, flatly denies the allegation of false accounting.

HP has alerted the US Securities and Exchange Commission (SEC) and Britain’s Serious Fraud Office (SFO) over its allegations, which wiped out HP’s profits for the quarter leading to a net loss of $6.9bn being reported yesterday versus a £200m profit last year. A further $3.8bn was added to the non-cash impairment charge of $8.8bn taken in total in relation to Autonomy in the fourth quarter of HP 2012 fiscal year. The extra money, not linked to the "serious accounting improprieties", is for loss of expected revenues.

In its statement the American conglomerate said: “HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP. These efforts appear to have been a wilful effort to mislead investors and potential buyers, and severely impacted HP management’s ability to fairly value Autonomy at the time of the deal. We remain 100 per cent committed to Autonomy and its industry-leading technology.”

Autonomy’s founder and ex-chief executive, a Cambridge graduate a key ‘silicon fen’ player in the UK who sits on the board of the BBC and advises the government as Prime Minister David Cameron’s technology specialist, has denied the allegations of impropriety and defended his senior management team, more than half of whom left HP after the acquisition last year, citing bureaucratic procedures. HP’s chief executive Meg Whitman, a technology veteran who oversaw the growth of eBay from 30 staff to 15,000, also has political connections and in 2010 campaigned unsuccessfully to become governor of California.

In a BBC TV interview last night Lynch claimed that the write down of his old firm, which specialises in data analytics on information storage and retrieval especially for unstructured data on emails and video, was in fact caused by the exit of his old senior management team and that he felt “ambushed” by HP’s announcement.

News analysis
The claims mirror comments made last December by Lynch at the Bloomberg Tech Summit at Millbank Tower in London when he made some polite noises about the joining of the two companies offering huge opportunities and that “massive change is imminent” in the IT sector with “big data at the heart of this inflection point”, but also continually stressed that Autonomy must be allowed to live up to its name under the post-acquisition management structure. The writing was on the wall then for this partnership it seems, but this latest twist involving the SEC and SFO promises a battle royale to come after the coming months.

HP is also understood to be gunning for Autonomy’s auditor’s Deloitte, as well as the old senior management team, via the civil courts, pointing out in its statement that it would be seeking “redress against various parties”.

The Autonomy deal was curated by Leo Apotheker, the ex-SAP head who only lasted for a year at HP before being replaced by Whitman. HP’s due diligence on the deal was carried out by KPMG, Barclays and Perella Weinberg, all of whom may yet be dragged into this growing dispute.

Autonomy was founded by Mike Lynch in 1996 and grew to become one of the largest software companies in the UK and standard bearer for the industry in the country. It acquired a number of other firms, such as Zantaz, during its rise to the top. HP's decision to purchase Autonomy was a key element in the US giant’s strategy to move away from making computers, printers and hardware and instead move into the more profitable software business. The short-term future of this strategy, at least, must now be under doubt, although the fundamentals are correct if HP wants to avoid the commoditisation trap.

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