Deconstructing the HP-Autonomy acquisition controversy

Please pardon my French - but sh*t has certainly hit the fan in HP’s acquisition of Autonomy.

For those joining late, here is a quick run down. HP is alleging that UK software vendor Autonomy, which it bought for $10-11 billion in August 2011, had mis-stated its pre-acquisition financials. (You may want to read some context and history about Autonomy we published yesterday.)

Specifically, HP says that Autonomy:

  • Passed off low-margin hardware sales as high-margin software sales
  • Booked hosted software revenues upfront instead of accruing over time
  • Passed off sales to resellers as sales to end customers.

According to HP, these painted a false picture of Autonomy finances and growth prospects, leading to an excessive purchase price. Now, almost a year down the road, these shenanigans have come to light and HP has booked a loss of $8.8B, of which $5bn it attributes to fraud.

Mike Lynch, the hard-charging founder of Autonomy -- who was shown the door by HP in May  for not meeting sales targets -- has rejected the HP allegations as completely false and implied that HP is resorting to "big bath" behavior to hide it’s lack luster performance.

Now, it’s over to the regulatory authorities and auditors to ferret out the truth of the claims and counter claims.

Here's my quick take on M&A dynamics and the questions around the price HP paid for Autonomy, which are central to the controversy...

  • Autonomy, was a publicly-listed company in the UK and HP paid a 64% premium over its then market price. Even without the current HP claims of accounting skullduggery by Autonomy, it was widely considered at the time that HP, in its eagerness to acquire a major software vendor, overpaid. Oracle, who’s generally much savvier when it comes to M&A, says it passed up Autonomy, considering it too pricey even at $ 6 billion.
     
  • Any company wants to present itself in the best possible light to a potential suitor. Nothing wrong with that but flagrant flouting of accounting regulations is never kosher.
     
  • At the same time, buyers must engage in due diligence prior to any acquisition in order to take a long and hard look at the real value of the asset / company being considered.
     
  • In addition to internal resources, buyers rely heavily on external advisors during this process. Match-makers (i.e., investment bankers) are paid on a contingent basis -- meaning they get their fees only if the deal closes. So, these match-makers try very hard to find common ground on valuation and other deal terms.
     
  • As with any other such deal, an army of other advisors consisting of accountants, bankers, and lawyers was involved in the due diligence prior to this acquisition. But what’s surprising to note is that HP does not seem to have consulted with any independent industry experts. In this instance, cashflow castles possibly built on quicksand spreadsheets seem to have prevailed over common industry knowledge about Autonomy.
     
  • It's a very common practice for buyers to validate their investment hypotheses and assumptions with multiple neutral third parties. Subject matter experts validate assumptions about the industry growth rates, competitive differentiators, the quality of the technology offerings, and customer feedback.

For instance, some private equity and venture capital clients investing in the marketplaces we cover subscribe to our research for precisely the same reasons -- to get an objective, independent view of the 200 vendors we cover. Our evaluations may be considered comparatively critical, but we’re just holding a mirror that reflects customer voice.

More important to you as a buyer of enterprise technology, we will look at some of the questions facing current HP/Autonomy customers and potential customers in light of this current sordid saga. Stay tuned for that...


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Alexander T. Deligtisch, Co-founder & Vice President, Spliteye Multimedia
Spliteye Multimedia

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