Print 12 comment(s) - last by notanakin.. on Dec 3 at 8:54 PM

HP is not moved by Dr. Lynch's "open letter"

New CEO Meg Whitman and the top brass at Hewlett-Packard Comp. (HPQ) show no signs of backing down from allegations that Autonomy's former owners committed approximately $5B USD in accounting "improprieties", which they suggest amount to fraud.  Even as Autonomy's former CEO, co-founder, and co-owner Dr. Mike Richard Lynch fired back with an open letter and media interviews regarding errors in HP's accusations, HP has released a new statement making it abundantly clear that it feels it is in the right and plans to press potential criminal penalties via regulators.

In the statement HP acknowledges for the first time officially that UK regulators and their counterparts at the U.S. Federal Bureau of Investigation/U.S. Security and Exchange Commission are investigating Autonomy as rumored.  The company writes:

The matter is in the hands of the authorities, including the UK Serious Fraud Office, the US Securities and Exchange Commission’s Enforcement Division and the US Department of Justice, and we will defer to them as to how they wish to engage with Dr. Lynch. In addition, HP will take legal action against the parties involved at the appropriate time.

It adds menacingly:

While Dr. Lynch is eager for a debate, we believe the legal process is the correct method in which to bring out the facts and take action on behalf of our shareholders. In that setting, we look forward to hearing Dr. Lynch and other former Autonomy employees answer questions under penalty of perjury.

That statement would certainly seems, in a roundabout way, to accuse Dr. Lynch of engaging in further obfuscation/lies in his public statements.

HP suggests ex-Autonomy Corp. CEO, Dr. Mike Lynch, is risking perjuring himself if he repeats his current statements. [Image Source: HP]

The battle between HP and Autonomy's former employees/owners is an intriguing one as it also pits two of the world's largest accounting firms against each other.  Autonomy's accounting was done by Deloitte LLP, which in a comment to Reuters stated, "[All Autonomy accounting was done] in full compliance with regulation and professional standards."

But according to HP's own accounting super-power, PricewaterhouseCoopers LLP, forensic audits confirmed grave accounting malfeasance in Autonomy's books.

By the sound of it, the pair is headed on a collision course both in civil court, and potentially in criminal court if UK or U.S. officials determine criminal charges are warranted.

Autonomy poster
HP claims it was blindsided by Autonomy's "hidden" downsides. [Image Source: Autonomy]

The pending battle is a big risk for HP.  While it faces serious image damage in the eyes of consumers by bringing attention to the ugly mess, the move does have a potential payoff to shareholders if HP can win back some of the billions it lost on the purchase in court.  However, should HP's claims be invalidated, the company could see all that image damage be for naught, a nightmarish scenario in which both shareholders and corporate image would suffer.

Sources: HP, Mike Lynch via the WSJ [PDF]

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Let buyer beware?
By bupkus on 11/28/2012 2:03:32 PM , Rating: 3
If HP had time and opportunity to inspect Autonomy's books, enough to discover those practices, should they first be suing those they hired to do the job of inspection, ie PricewaterhouseCoopers LLP?

RE: Let buyer beware?
By rdhood on 11/28/2012 2:31:49 PM , Rating: 2
No. For the acquisition, HP relied on Autonomy's accounting firm, Deloitte LLP. HP assumed that Deloitte LLP was a big enough, trustworthy enough firm that they did not need to do a big investigation with another firm.

Frankly, it sounds like sheer laziness on HP's part. HP was the only bidder, and offered twice as much as Autonomy was worth. You'd think that they would want an independent evaluation. When I buy a used car or a house, I get my own inspection. Some things are too big and expensive to trust to third parties that have no obligation to the purchaser. Deloitte LLP do have an obligation to their own reputation, and now it looks like HP will test that.

Of course, I still say this is all BS. Everyone, including Oracle, said that the purchase price of $6B was way too much, and HP paid twice that. They knew what they were doing.

RE: Let buyer beware?
By Schadenfroh on 11/28/2012 6:45:58 PM , Rating: 2
They knew what they were doing

I assume "they" are the shareholders of Autonomy when "they" laughed all the way to the bank?

RE: Let buyer beware?
By rdhood on 11/29/2012 9:54:05 AM , Rating: 2
"They" are HP management, who knew that they were paying too much for Autonomy.

RE: Let buyer beware?
By drycrust3 on 11/28/2012 10:18:41 PM , Rating: 2
No. For the acquisition, HP relied on Autonomy's accounting firm, Deloitte LLP. HP assumed that Deloitte LLP was a big enough, trustworthy enough firm that they did not need to do a big investigation with another firm.

Excuse me! This isn't HP buying a $10,000 business, this is HP buying a $10B business! The problem here wasn't at Autonomy, nor Deloitte, nor at PWC, the problem HP have is entirely within the Board Room.
Go and look at the Wikipedia entry for Autonomy: Revenue = $870M, Net Profit = $217M. What more did the Board of Directors need to know that this wasn't worth $10B?
As someone said at the time, "If the HP board of directors approved paying $10B for a company with the profit of a less than $6B, then they need to explain that to their shareholders."

RE: Let buyer beware?
By json19 on 11/28/2012 10:42:29 PM , Rating: 2
Agree 100%. Any outsider saw this coming from a mile away. HP was trying to put a positive spin on this from day one. They were trying to convince people that this acquisition would magically unlock value with their managed print services and enterprise solutions. The outcome of this is going to be incredibly embarrassing.

RE: Let buyer beware?
By simsony on 11/29/2012 4:09:20 AM , Rating: 2
Though I think HP made a mistake, and Autonomy is not worth $10 bn ever, just looking at revenue today to decide the price is also incorrect. Say some game changing tech in the pipeline?

Perhaps the books were showing Yr 1 profit 217M, Yr2 -800M, Yr3 1900M, Yr 4 - 4000M, Yr 5 - 7000M or something. These are just numbers I've thrown in, but if a business could show such figures through secured revenue (I don't think a business can), then large valuations are possible.

Again I am not defending HP, the board seem to be filled with idiots, but it also isn't as black and white as you put it. The argument that you decide the price of the company just on revenue, ignores pricing in the risk and potential of a company. A handful of tech companies with no revenue have become quite successful.

RE: Let buyer beware?
By Strunf on 11/29/2012 7:57:13 AM , Rating: 2
Exactly... Google payed payed $12bln for Motorola Mobility when they weren't even making any profit at all and if Apple starts losing trials against Motorola they will be bitting their fingers for not having toppled Google's offer.

Also the market value of Autonomy was something like $5bln, there is no way investors would sell it for less than $6bln...

RE: Let buyer beware?
By drycrust3 on 12/1/2012 3:12:46 PM , Rating: 2
Also the market value of Autonomy was something like $5bln, there is no way investors would sell it for less than $6bln...

So what have they got that makes their "market value" $5B? A net profit of $217M?

RE: Let buyer beware?
By vision33r on 11/30/2012 1:54:36 PM , Rating: 2
During the whole purchase all parties involved pocketed the cash and left HP and it's shareholders out cold.

The CEO at the time wasn't Meg Whitman, it's Leo the guy who wanted to kill PCs at HP. He got his cool $100mil+ for just 6 months of work on the job including signing off on the Autonomy purchase.

Again, CEOs manipulated the company to their own advantage and ran.

RE: Let buyer beware?
By notanakin on 12/3/2012 8:54:35 PM , Rating: 2
No. For the acquisition, HP relied on Autonomy's accounting firm, Deloitte LLP. HP assumed that Deloitte LLP was a big enough, trustworthy enough firm that they did not need to do a big investigation with another firm.

Where on earth do you get this information from? NO significant acquisition is made on the basis of "trusting" the target's auditor in my experience. If this is in fact what HP did, that alone is an act of incredible stupidity.

I've done due diligence work before and the question must be why HP did not see these problems when they did the acquisition. It seems to me that instead of taking responsibility for shoddy work, they're blaming the past management for hiding stuff. But checking what the real position is is (partly) what due diligence is about.

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