While Hewlett-Packard (HP) sues Autonomy founder Mike Lynch and CFO Sushovan Hussain for cooking the books, the extent of HP’s oversight of the deal have come to light.
The latest revelations come as HP is preparing to split and put its current CEO, Meg Whitman, under the spotlight.
Legal papers filed by shareholders against HP allege that industry experts warned that Autonomy’s technology was outdated and suffered from increased competition from numerous other companies. "Financial analysts viewed Autonomy as highly overvalued and cautioned that its financial statements contained potential accounting concerns, such as revenue recognition and profit margin," they said.
The filings show the CEO of the time, Léo Apotheker, drove through the acquisition of Autonomy despite reservations from HP’s chairman Ray Lane.
In an email responding to Apotheker, Lane wrote: "I am still haunted by Autonomy.
"I don’t think it is the panacea we think it is."
The shareholders claim that, if HP had conducted thorough due diligence of the technology, it would have learned that Autonomy’s Idol 7 database program had not been updated in the previous five years. "This information was known to many technology analysts in the field and HP," said the legal filing.
"Autonomy had many competitors and many of them offered products equal to or superior to Autonomy. For example, Vivisimo, one of the top enterprise search companies quietly acquired by IBM in April of 2012, has very advanced software. This is all information that HP knew or should have known before spending $11.7bn to acquire Autonomy."
The filings highlight a breakdown in communications between HP’s auditors, putting into question whether HP had conducted thorough due diligence exercise on the acquisition.
As the Financial Times pointed out, the issue HP now faces is not whether Autonomy was indeed a massive accounting fraud: The real damage for HP is that the way it conducts merger and acquisition (M&A) activity is now under scrutiny.
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HP knew of Autonomy hardware sales tactics.
An internal scorecard in 2012 of HP’s acquisitions published in the FT's Lex blog shows that every acquisition HP made missed revenue goals. And these acquisitions do not include EDS.
As Computer Weekly has previously reported, HP recently announced 30,000 job cuts in its Enterprise services division. The Enterprise Services business came out of HP's $13.2bn 2008 acquisition of EDS. By 2012, HP had written $8bn off its value.
While the shareholders’ fight against HP is now taking place in a public forum, HP is just a month away from taking its biggest bet to date: Splitting into HP Inc and HP Enterprise. The company’s current CEO, Meg Whitman – who has publicly spearheaded the legal case against the former Autonomy executive team – will be both chairman of HP Inc and CEO of HP Enterprise.
Autonomy’s Lynch has may have his wishes. In July 2015 he said: "Meg Whitman misled her shareholders.
"We hope this matter will now move beyond a smear campaign based on selective disclosure – and that HP will finally give a full explanation."