HP: Autonomy overstated 2010 profits, cuts them by 81 PER CENT

@TheVogon, Yes you most certainly would subject the accounts to forensic re-examination before making a multi-billion dollar purchase and HP indeed executed full financial and accounting due diligence and willingly went ahead with the purchase after having done so. The reality is HP for the second time in successive quarters were admitting to having to writing off billions of dollars of value (the first write down related to their EDS business, another bad purchase). The first time you do such a write-down shows careless management, the second, rank incompetence. Meg Whitman knew if she could not rustle up an excuse she would be toast. HP cast around for a scapegoat and subsequently came out with a number of slime-ball slurs against the Autonomy deal they had gone ahead with after executing full financial/accounting due diligence. It was clearly a desperate attempted excuse for their second inexcusable business write down. Additionally you yourself have given the precise reason why HP and any company involved in such a deal should execute due diligence by the fact you have said "sounds like Autonomy's accountants were likely also to blame." You don't spend billions of dollars without checking what you are buying, and checking independently, that the auditors employed by the company you are buying were doing as they were required to do it.

But in any case, so far, no evidence of impropriety has emerged. Tellingly, HP's accountants have not endorsed the company's earlier statements that financial impropriety was involed. To me that says they have adjusted the accounts as requested by Whitman (their customer) and, since they are auditors and have to maintain professional standard, have quietly but tellingly failed to back HP's position that there was fraud at play.

Look, undoubtedly Autonomy "bigged-up" the value of the company. Kevin Lynch does appear to be a salesman of the "if they buy it, that's their look-out" variety, but many would argue that he has simply proven he is a good salesman and effectively maximised the sale value of his company for his shareholders - e.g. he did his job properly. Meg Whitman, on the other hand, in buying it, clearly didn't do hers.

Re: Autonomy reported profits of £105.7m for fiscal year 2010, The real profit was just £19.6m

"Plus $105M profit on $175M turnover, how come no-one called BS on that?"

In the world of software and intellectual property that's possible. Whilst Autonomy's business was different, consider the case of a packaged office software suite, which the code owner sells to distributors at say $150. Once they've paid for the development up front, the marginal cost of producing each new sale is the cost of a cardboard box and an installation disk (if you're lucky).

In the consumer world you've got big marketing costs and fat overheads, in the B2B world they are generally far lower. I used to work for a B2B software house (not Autonomy) and our gross margins were huge, our corporate overheads minimal, our marketing budget tiny.

Curiously enough the firm I worked for's accounts were crooked, directors fraudulent, and the firm (with turnover in excess of £100m) managed to go bust on the back of debt fuelled acquisitions, despite being the largest UK company in its field, and one of the largest in the sector in the world, with a roster of blue-chip customers. Few large software companies develop their own code from scratch, they buy smaller more innovative companies, and that means a continual trail of more (or generally) less successful acquisitions, over-hyped, over-priced deals, shed loads of debt, and both sides of the deal trying to ramp up the importance of the acquired company and its product. That's the world of software, IMHO, and it's why big companies make bad deals, and often fail to deliver on the promise of the acqusition.

HP are guilty of both gross negligence in their due diligence, but also of failure of their duties to shareholders by overpaying so outrageously even on claimed profits. And strategically they are guilty of incompetence by having no realistic plan to deliver value from the acquired business, and of strategic malfeasance by their failure to learn from their own past mistakes, or those of others in the industry.

HP bought EDS, but the parasite has now taken over the host, and HP is not in my view a technology innovator, not a software house, just a lard-bottomed, poor quality outsourcer making big promises to customers that (to judge by the unhappy experience of my current globo-corp) HP cannot deliver on, despite high outturn prices. Given those opinions, I wouldn't expect them to make a success of M&A, but it's important to remember that M&A is the last refuge of scoundrel directors, seeking a smokescreen to hide their inability to run their existing business.