Let’s cut to the chase about the HP-Autonomy fraud allegations.
HP massively overpaid for Autonomy last year. It did so because it was a distress purchase. HP’s core business is shrinking and it needs to transform itself into a software and services company. It tried to do so with one giant purchase, rather than a series of smaller, easily digestible acquisitions.
Hardly had the ink dried on the deal than HP was writing off billions of pounds that it paid for the company and moving on Leo Apotheker, the short lived former chief executive, who pushed through the purchase.
HP has form on disastrous acquisitions - whichever CEO has been in charge. In recent years it has consistently overpaid and under delivered. Its purchase of outsourcing and services firm EDS in 2008 has not resulted in the transformation HP hoped for. Its purchase of 3Com in 2009 didn’t deliver the results expected.
The 2010 purchase of Palm was meant to propel it into the mobile space. New mobile devices were launched and pulled with bewildering rapidity. Just 14 months after spending $1.2 billion on Palm, HP halted all production of devices - tablets and smartphones based on Palm’s webOS.
That is bad enough, but HP’s allegations of fraud at Autonomy centre on revenue recognition on sales.
From the outside it is impossible to know the details, but we do know that revenue recognition is a perennial issue at software companies.
Major question marks over revenue recognition were common place in the merger and acquisition mania around the first Dotcom boom at the turn of the millennium. Anyone listening to earnings calls from the major software houses today knows the issue is still live, with CEOs expressing relief as a major sale is booked for that quarter, or apologising for missing earnings guidance because a sale was pushed back by a few weeks.
Whatever emerges around Autonomy’s revenue recognition practices, we can say for certain that this issue should have been the focus of the 300 auditors that HP sent to crawl over Autonomy’s books.
HP’s new CEO Meg Whitman is now, in effect, accusing two of the world’s biggest audit firms of incompetence at best - Deloitte who were Autonomy’s auditors and KPMG which it appointed to carry out due diligence on Deloitte’s oversight of Autonomy’s books. It is now making charges based on the work of a third giant audit firm PwC.
The issue then has the potential to spread far wider than the IT industry, with only the lawyers likely to benefit.
And what of Autonomy? Everyone knew it was up for sale and its management team and auditors did their utmost to put its best face forward. They would have been negligent to do otherwise. Some City analysts didn’t like what they saw and factored that into their valuations of the company. They too were doing their job. If you took their advice, you didn’t buy the stock.
Given all this, it is not surprising that Mike Lynch, the company’s founder has come out fighting.
His reaction is not really about defending his position as a poster boy of British technology. That isn’t a position he sought. Spend just a few minutes with Mike and it is apparent that while he did his utmost to make Autonomy a successful company, and while he takes entrepreneurship seriously, his true passion is technology. He revels in the can-do attitude of the best tech start-ups, not the board room politics and bureaucracy of large corporations.
Ask him whether a young technologist should work for a solid industry giant or a start-up, and he grows misty eyed and says, ‘take the chance’.
The Serious Fraud Office investigation unleashed by HP, whatever its outcome, is likely to damage Mike’s plans to champion the next generation of innovative UK-based start-ups and that is to the detriment of us all.
As for HP, its accusations against Autonomy’s former leadership team can’t disguise the company’s appalling results and they raise more questions than answers about HP’s own corporate governance.
They still have one asset though, however this debacle plays out. They have Autonomy’s software - and it is excellent.
Now read: The thoughts of Mike Lynch