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back to article Autonomy founder attacks HP fraud charges with new website

British software entrepreneur and Autonomy founder Mike Lynch has launched a new website dedicated to airing his ongoing grievances with HP, which has accused him and other former Autonomy execs of misrepresenting the company's finances. The site, which is hosted at AutonomyAccounts.org, says it aims to provide "relevant …

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With the mighty sword of truth and trusty shield of British fair play...

Lynch either believes what he is saying or is going for the full Jonathan Aitken brazen denial approach.

To me from the outside his points look really quite valid. I remember there was surprise about the price being paid when the deal first went through and that they had possibly overvalued Autonomy by $5Bn based on the books as presented.

What wouldn't surprise me would be if there was some accounting that was a little misleading and possibly not best practice that may have exaggerated the value a little but the scale was fairly modest (upto a billion dollars valuation effect). I think I will be surprised if it is found that there was a $5Bn fraud but I have been surprised before at times.

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Anonymous Coward

Re: With the mighty sword of truth and trusty shield of British fair play...

I personally don't believe a word HP say, their track record on acquisitions is appallingly bad.

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Unhappy

Re: ...the mighty sword of truth and trusty shield of British fair play...

...won't mean a damn if the US decide to extradite them (no evidence needed) then offer them a plea bargain (18 months in an open prison if you plead guilty, or 30 years in a supermax if you make us have a trial).

See, they were guilty all along!

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Gold badge

Re: With the mighty sword of truth and trusty shield of British fair play...

It's actually totally irrelevant what HP states - you cannot explain away a write down of such magnitude by blaming someone else. That's the whole idea of due diligence, and since they have not started to sue the crap out of the company who performed that I think we can safely assume HP knows full well it is pure BS.

Having said that, I do wonder why Lynch doesn't hang them (sorry) for defamation..

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Re: With the mighty sword of truth and trusty shield of British fair play...

A wrong move methinks. Be very careful of appearing to protest too much.

How can anyone judge who is in the right from two partial accounts? That's why we have a judicial or quazi-judicial process to get to the bottom. More likely (but still not certain) of getting the right answer. And the one I'm probably going to run with.

I doubt any judge is going to take a blind bit of notice of any website statements by HP or the old guard. On oath and cross examined is bound to be more fruitful. So why the website?

If truth is on their side then using as a blade in court rather than a sledgehammer online is what they should be concentrating on. And if they win then a tidy defamation case should very well compensate for any diminution of their reputation by HP's allegations.

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Silver badge

Re: With the mighty sword of truth @Fred Flintstone

"Having said that, I do wonder why Lynch doesn't hang them (sorry) for defamation.."

Largely because HP can simply outspend him legally. I would guess that HP's legal budget is around about $500m a year. You don't even have to spend that on litigation - friend of mine has a valid claim against a big three headed dog of a private equity house, and a series of top US law firms agreed to take the case, and as soon as they broke cover the PE house "persuaded" them to drop the case in return for the promise of future M&A work. As there's always more money in corporate finance than in litigation, they all took the devil's dollar.

In a related aspect of the same case, a big UK based bank now largely owned by the taxpayer is refusing to do anything unless sued. With a widely distributed £200m+ legal budget every year, virtually every major law firm is conflicted out - and that appears to me to be an intentional policy.

So Lynch may well struggle to get a law firm of the scale and expertise that HP will use to represent them, and HP's annual legal budget is probably about the same as Lynch's entire personal wealth.

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FAIL

fail both ways

Either way, HP have failed big time. If they did inflate value their company by 9 times its value, then HP's due diligence was woefully inadequate. If HP has managed to destroy the business in the relatively short time they've owned it - that too is a masive fail.

We all thought the purchase was pretty over valued - seen as a desperate move on HPs part to reposition itself in the corporate services sector, along with the announced closure of its hardware business.

So i recon that its a bit of both, and HP is just going from one misjudged cockup to another.

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Anonymous Coward

Re: fail both ways

HP is not the first, and it will not be the last, US company to overvalue something because they were desperate to prove they could inflate the share price through acquisitions. Remember Time Warner/AOL? MySpace?

Company valuation is extremely difficult. If what a company does is difficult and complicated - surely a description of the typical software company - then all accountants can do is tell you what happened in the past. Anyone familiar with the stock market is aware that a graph that is going up may at any second start to go down - look at the Apple price this year; when it reached $700 analysts were saying there was no reason it should not go to $1000, whereas it is now in decline at around 580. The only people who knew that would happen were a relatively small number of geeks with an in-depth knowledge of the trends in the mobile device industry, and they wouldn't talk to analysts even if the analysts knew who they were.

So yes, I would tend to agree except to note that there was probably no way that HP could have done proper due diligence on such a company. Tech companies should recognise this and simply stop with the acquisitions. Perhaps if they hired a few CEOs with more humility and the willingness to look at the business and take practical steps to improve matters - Thorsten Heins at RIM seems to be one such - there would be less boom and bust.

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Gold badge

Re: fail both ways

Company valuation is extremely difficult

Well, that's one way of explaining the Facebook valuation..

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Anonymous Coward

I love it that site search on AutonomyAccounts.org is so cruddy

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It's probably using IDOL then.

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This post has been deleted by its author

A bit more reading suggests . . .

Autonomy was a conventional software house, mostly, generating consultancy fees. Doubtless the consultants were bundled into software sales, making the software appear far more valuable than it was. So HP actually paid $5M a head for a professional services firm. Very hard to scale, but probably, the consultants have mostly left now anyway.

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pig

Re: A bit more reading suggests . . .

"So HP actually paid $5M a head for a professional services firm. Very hard to scale"

Funny thing. I remember reading that, on these very comment pages, before the deal was concluded.

I find it hard to believe HP on this when a majority of articles and comments I read on the deal seemed to be saying "They are massively overpaying and won't be able to scale the business".

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Go

If this turns out to be a smoke screen, do you think we'll see Mike Lynch turn round and sue the arse off HP for slander a little while down the line? Popcorn at the ready.

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Terminator

Translation

"For its part, HP seems to be taking all of this in stride. "While Dr. Lynch is eager for a debate, we believe the legal process is the correct method in which to bring out the facts and take action on behalf of our shareholders," the company said in a statement in November, and it has remained mum on the matter ever since"

In other words "we didn't expect the Brit to fight back quite like he did and we need to re-trench and come up with a new strategy of explaining our piss poor performance"

(above is my interpretation on their statement - time will tell who was right)

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Re: Translation

"In other words "we didn't expect the Brit to fight back quite like he did and we need to re-trench and come up with a new strategy of explaining our piss poor performance"

I think they did expect this as one of a range of possible responses. Unless their legal teams are as incompetent as HP's board, they would have run through the options open to Lynch before HP went public with its accusations, and have a strategy to respond accordingly.

Having said that, this is high stakes poker by Whitman. Having herself voted for the Autonomy deal, she doesn't want to rely on her best defence that "it was all Leo's fault". So having decided to brazen it out, she's hoping that the probably quite modest dirt that may be found in Autonomy's accounts will be sufficient to justify the accusation, despite the fact that most "software" companies present similar issues of turnover classification and revenue recognition.

If they can't substantiate the accusations to credible degree, then Meg becomes another one in a now rather long line of shop-soiled CEO's over in Palo Alto. In that case, success for Lynch in a defamation case would probably not result in material losses for HP given their scale, but lawyers supposedly representing HP stockholders would be able to hammer the company with a class action (although suing the company you own doesn't make that much sense).

I seem to recall that Leo's pay packet including golden parachute was around $100m for his few months of chaos at HP. That highlights what the real issue is, and that is the appallingly low standard of corporate governance in major US corporations (not that the UK or Europe are much better).

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Anonymous Coward

Re: Translation

That's about right. She is hoping that the mere hint of accounting impropriety will absolve the HP mismanagement team of all responsibility for what was obviously a huge overpayment. If they can find something, anything that wasn't accounted for properly in Autonomy's books, they can claim fraud, throw their hands up and walk away. When, even if they find minor accounting improprieties, this is still a 95% HP overpayment, 5% fuzzy accounting issue.

Strained metaphor.... it is as though someone paid $20,000 for a car that has a street value of $5,000 with the promise that it is in good working condition. Upon an inspection, they find that $1,000 must be spent to replace the brakes. They then talk about how they were misled and the $1,000 repair lowered the value of the car by $15,000 now that they have all the facts.... This is assuming that HP's claims are valid, which they might not be at all.

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Everyone knew this was an absurd deal - except for Leo Apotheker

See this posting from FT Alphaville last September:

http://ftalphaville.ft.com/2011/09/13/676131/autonomy-shareholders-bite-the-hand-off-hp-or-have-they/

Important quote:

"The high acceptance level reflects the fact that Christmas has come early for Autonomy shareholders. HP’s offer is almost too good to be true. A cash offer at a 65 per cent premium — no investor could be blamed for taking advantage of HP’s largesse (and sheer desperation) for tendering at the first close. Who cares if another bid comes along – an off of £25.50 a share is beyond the wildest dreams of most shareholders."

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Anonymous Coward

This is a match made in heaven - or is it hell?

A loudmouth, jack-the-lad ex-CEO of a smoke-and-mirrors company that got out of its depth with over zealous acquisitions of other smoke-and-mirrors companies. And then along came the mugs in the shape of HP...

Versus

A has-been technology giant desparately trying to buy itself back into the "cool" group - even though it knows that previous acquisitions (EDS, Palm...) have been disasters due to it's own incompetence. It is so desperate that "due diligence" or questions like "Is this Autonomy thing a real business?" are seen as inconveniences in their quest to acquire, acquire,...

I love it!

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Devil

They can both be right

Lynch's logic seems to be that if HP messed up, he couldn't possibly have been cooking the books. It is entirely possible that Lynch and co were misrepresenting / over-inflating revenues *and* HP overpaid for Autonomy and then found they couldn't scale what was actually a pro services business and not a software company.

There are plenty of red flags to suggest all was not squeaky-clean with Autonomy's accounting practices:

1) As reported here at El Reg, Autonomy sold a $6m deal while simultaneously agreeing to buy from the same customer $8m of software, and then booked that $8m as a marketing charge. You just boosted revenue by $6m for the quarter, and the customer didn't pay a dime. To anyone reading the accounts, it just looks like you over-spent on marketing rather than bought yourself a deal.

2) Recognizing deals as revenue that have not been delivered in the same quarter (probably because of large amounts of pro services required) is against all accounting rules. Lynch maintains that's a difference between US and International accounting. It isn't -- it's misrepresenting revenue under both sets of rules. Deals not delivered go into the deferred revenue bucket and are not counted as revenue yet because they can go bad during implementation.

I could go on, but you get the idea.

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Gimp

They've got form

HP CEOS are very good at pissing money up the wall and then pointing fingers later. Palm, EDS and now Autonomy were all bought in a rush and all have been subject to write downs since. A pity they aren't so impetuous when it comes to staff reward.

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