HP vs Autonomy - a high-stakes game with a big loser

Congratulations to HP for creating a global flood of words about its increasingly controversial purchase of British software company Autonomy last year.

The accusations of “questionable accounting and business practices” that led to HP making an $8.8bn write-off on the $12bn acquisition has shocked and surprised most people who followed the rise of Autonomy into the FTSE100, becoming the UK’s leading home-grown software firm.

Already there is something of a transatlantic divide emerging, with US media reports adopting a tone of, “How can this foreign company do such an awful thing to our HP”, while the UK press goes for, “How can they have done this to our Autonomy?”

But there seems to be several vital issues around which there is general agreement, and have to be the place to start for any attempt to work out just what is going on.

  • HP overpaid for Autonomy in the first place.
  • HP has a terrible track record of losing value from major acquisitions – look at EDS and Palm, for example.
  • HP was on track to lose huge value in Autonomy anyway, with large numbers of former staff quitting the company since the purchase.
  • HP’s announcement of the accusations completely overshadowed yet more dreadful financial results, with areas of its business haemorrhaging revenue – personal systems sales down 14%; servers, storage and networking down 9%; services down 6%; even the cash cow of printers was down 5%. Ironically, software revenue – which includes Autonomy – was the only bright spot, growing 14%.
  • Plenty of people are coming out of the woodwork now to say Autonomy has long been viewed as using creative accounting techniques – but still it was a quoted company, regularly audited and given a clean bill of health, and which went through a thorough due diligence by HP’s advisors that failed to uncover any discrepancies of the kind now being accused.
  • HP, despite the gravity of its accusations and the size of the financial hit, did not tell Autonomy founder Mike Lynch, nor any public authorities, about what it had discovered before issuing a press release detailing its claims. That in itself seems an extraordinary decision.

The question that everyone is asking, is how could alleged accounting malpractice on a scale that warrants an $8.8bn write-down not have been noticed by any auditors or financial advisors, both before HP’s acquisition, and in the year since?

If the allegations are proved – and it will probably take years of detailed and costly court cases before we ever get to that point – it would raise issues around the whole corporate governance regime in the UK, were a FTSE-listed company to have got away with such practices for so long. The worst case is if Autonomy turns out to be a British Enron or Worldcom.

If the allegations are overblown – well, HP’s reputation would fall off a cliff. If CEO Meg Whitman and HP’s board harboured any doubts about the accusations, or are proved to have totally over-reacted to some questionable but not illegal accounting, it could be the final straw for a company in trouble whose investors are already concerned over its continued decline.

Someone is going to be a very big loser when this high-stakes game is played out.

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