By Andrew Saunders Wednesday, 21 November 2012

HP vs Autonomy - did they or didn't they?

HP says the price it paid for Autonomy was deliberately jacked up. Autonomy founder Dr Mike Lynch comes back fighting and flatly denies it. Who's right? Who knows?

That’s what makes it a perfect story - high stakes, high drama and larger than life characters, with enough credibility on either side to keep the conspiracy theorists happy.  

Starting with the case for the prosecution, m’lud, HP’s allegations about the way in which it reckons Autonomy bosses allocated revenues and booked sales are pretty considered. And if true, they would seem to amount to mis-representation of the value of the company. Meg Whitman is an experienced hand and, as someone not actually involved in putting the deal together, she ought to be reasonably objective too. You don’t go to the SEC and the SFO with unsubstantiated hunches. 

Neither is it any secret that pre-merger, Autonomy had a name for being a swashbuckling and aggressive operator, and that its boss and founder, Mike Lynch, was a driven and ultra-motivated individual. ‘Working at Autonomy is fun’ as he once told MT, likening it to flying a fighter jet. ‘But every now and again you are going to vomit in the cockpit.’ And now, echoing the death of drummer Eric ‘Stumpy Joe’ Childs in the cult movie Spinal Tap, someone else seems to have inhaled the vomit.  

Just the sort of outfit you might expect to push the rules as far as they will go, in other words. Maybe even a bit further. But does that mean that it actually did so? No.  

For the defence, for starters there is plenty of circumstantial evidence that all was not well with HP’s acquisition of Autonomy pretty much from the off. Shareholder ire that it paid too much for the British firm cost HP’s then CEO Leo Apotheker his job. The cultural fit between the established, process-heavy old-school tech people at HP and their maverick, arrogant and sharp-elbowed Autonomy colleagues was so bad that it alone could have stymied any chance of value-creation the deal may have had on paper. That the merger was mis-handled by HP is self-evident - top people left Autonomy in droves, including, of course, Lynch himself. 

Then there’s the scale of the alleged deception - if Autonomy’s value really was overstated by $5bn - that’s pretty much half the purchase price - how come HP didn’t notice until now? That’s an awful lot of value to have lost down the back of the sofa, especially when some of the biggest names in the business - including KPMG and Deloitte - were involved in the due diligence process.  

Sceptics - including Lynch himself - point out that this does strain credibility somewhat. But does it really? Paper trails can be created which tick all the boxes but bear little relation to what is actually happening on the ground. That takes deeper probing to establish. 

Eager for a quick win to help transform it from a struggling old-economy manufacturing engineer into a whizzy new-economy IT services business, it’s also quite possible that HP’s (famously fractious) board just didn’t look that closely. But big deals are inherently risky, as they have now found out the hard way. Much more prudent to adopt the approach IBM used when faced with the same problem, taking many smaller bites over the course of a decade rather than one huge gulp.  

In the end it may come down to who’s got the best lawyers, the most to lose and the strongest stomach for a fight. And that’s a pretty close run thing. 

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