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November 26, 2012
HP Autonomy Mike LynchAutonomy founder and former CEO Mike Lynch has pushed back hard against Hewlett-Packard’s (NYSE: HPQ) claim that Autonomy used misleading accounting to boost its valuation, according to a published report.
Lynch’s point is that $200 million worth of revenue fudges, even if it did occur, could not have triggered a $5 billion slide in Autonomy’s value. Doesn’t make sense, it’s bad arithmetic, he said. “After being ambushed by all this yesterday, I’ve had a chance to look at some of the things that they’re saying — it just doesn’t add up,” Lynch said last week. “HP is looking for scapegoats, and I’m afraid I’m not going to be one of those.”
Specifically, what misdeeds is HP accusing Autonomy of committing? According to one blog, HP believes Autonomy sold some hardware at a loss, or at best at a low margin, particularly during the eight quarters immediately prior to the acquisition, but booked those transactions as high-margin software sales; HP also contends Autonomy sold software to VARs but listed it as end-user sales; and, HP asserts that some Autonomy subscription-based hosted application deals were recorded all at once rather than posted as deferred revenue.
Right now HP is talking tough about legally pursuing former Autonomy executives who allegedly misled the vendor during the acquisition process in 2011. On the vendor’s Q4 2012 earnings call, chief executive Meg Whitman said that “HP has contacted the SEC’s enforcement division and the U.K.’s Serious Fraud Office. We have requested that both agencies open criminal and civil investigations into this matter. In addition, HP intends to seek redress against various parties in the appropriate civil courts to recoup what we can for our shareholders.”
But Lynch, who departed Autonomy in May 2012 (around the time HP confirmed plans to lay off 27,000 employees) said that he hasn’t hired a lawyer nor has he talked to HP. “The first thing is to find out what they’re saying. Let’s find out what they’re saying and who they’re talking about,” he said. “So far, they don’t actually define it.”
Here’s Lynch’s statement, as posted here:
“Basically, we reject completely the assertion of HP. It’s completely wrong. The reality of the situation is that when HP bought Autonomy it had hundreds of people involved in due diligence, which was described at the time as “meticulous.” And KMPG, Barclays and Perella were all involved there. I don’t know any of the specifics because no one has been in touch with us. We’ve not heard anything from any partner other than what’s been in the press release.”
Lynch went even further, adding that HP chief executive Meg Whitman has “spent the day talking about this more than she has about delivering the worst results in HP’s 70-year history…HP needs to think more about the fundamental problems of its business. I hope they can rebuild what was once a great Silicon Valley company.”
That there is some tough talk back, wouldn’t you say? So, is Lynch bluffing or does he have a point, is HP pointing fingers elsewhere at convenient targets when it should be looking in the mirror?
The foundation for Lynch’s argument is this: Only a month and a half ago HP showed on-the-books goodwill and intangible assets of some $37 billion, a non-saleable asset, and a market value of about $29 billion. The difference–oh, only about $8 billion, is primed for a writeoff. What it all boils down to is HP has a big accounting charge, they don’t want to admit they overpaid for Autonomy, so they’re turning the blame around, Lynch would likely assert.
On the other hand, even if HP has a case and is able to successfully press and prove fraud charges, then what? It’s hard to see the vendor’s point in aiming the finger at Autonomy. It’s a bit late, isn’t it? In scolding Whitman to move on and put HP’s house in order, Lynch does seem to have the better argument in hand, in my opinion.
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