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Allegations Deepen in HP-Autonomy Dispute

By Michael Tanenbaum News | Current Affairs Nov 21, 2012
The conflict surrounding Hewlett-Packard's $8.8 billion write-down on software-maker Autonomy continues to unravel as allegations build.
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The development of the current stand-off between Hewlett-Packard and Autonomy, the British software maker acquired by HP for over $11.7 billion in October 2011, is likely to occupy headlines for a long while to come. The main point of contention in the disagreement stems from an allegation by HP that Autonomy engaged in accounting improprieties ahead of the acquisition, inflating growth metrics to attract prospective buyers. 

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The announcement by Hewlett-Packard that it would take an $8.8 billion write-down related to the purchase of Autonomy set off waves of press coverage, particularly as the breakdown appears symptomatic of the overall challenges now facing the PC's core industry. The acquisition of Autonomy took place originally under the leadership of then-HP chief executive Leo Apotheker, whose intention, despite the high sale price, was to help transition the struggling Silicon Valley icon into a more profitable, growing, and competitive data analysis market. 

Shortly after the deal, however, Apotheker was removed from his position and replaced by current chief executive Meg Whitman. HP redirected focus toward its core hardware products in printing, servers, and PCs, the New York Times' DealBook reports. Under Whitman, the company consequently diminished the importance of the Autonomy acquisition, a move aimed potentially at bridging Hewlett-Packard further into software.

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Autonomy founder and former CEO Mike Lynch, who led the company at the time implicated in HP's allegations, first created the enterprise software company in Cambridge, UK, in 1996. Autonomy's specialty in analyzing unstructured data -- e-mails, online video, and web surfing -- made the company an attractive acquisition, but Wall Street analysts deemed the asking price too high for a firm whose fast growth numbers were marred by reports of poor customer relations. Oracle held meetings with Lynch in 2011 to evaluate a potential acquisition, but the company felt Autonomy was already overpriced

HP's basic allegation is that Autonomy classified low-end hardware sales alongside its software numbers, inflating the company's projected revenue and profit margins based on future service relationships that did not actually exist. The improprieties, HP alleges, were masked by misrepresentations of Autonomy's expenses, with a 10% loss on hardware sales booked as a marketing expense, according to the NYT report. 

In an interview with AllThingsD's Arik Hessendahl, the Autonomy founder countered that HP's allegations were a blindside ambush. Lynch, who left his post along other top leadership in May of this year, denied that Autonomy did anything out of sync with Britain's International Financial Reporting Standard (IFRS) and downplayed differences with U.S. GAAP system. Lynch stated that Deloitte, Autonomy's auditor, tracked the company on a quarterly basis and was confident the numbers would not show any irregularities in revenue recognition through hardware resales.

In response to the initial portrayal of Autonomy's struggles, Lynch suggested that business only took a dive after the acquisition was complete, when HP allegedly began tacking service fees on top of Autonomy software sales billed through HP's Enterprise Service Group.  

Today, Bloomberg reports that accounting experts have called into question the motivation behind HP's allegations against Autonomy. The report suggests that analysts think HP is trying to divert attention away from a string of poor acquisitions and a failure to adapt to transforming market conditions. The company completed another write-down in August for Electronic Data Systems Corp. to the tune of $9.2 billion. 

Jonathan Weil at Bloomberg View contends that HP's numbers are hard to reconcile, and even a superficial analysis of its figures don't add up to an indictment on Autonomy as much as they do on HP's recent decision-making. 

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As Forbes' Tim Worstall points out in his round-up of HP-Autonomy coverage, this is the kind of story that will take a long time before any dust settles. As the particulars and personalities involved in this specific rift unfold, the big picture is starting to reveal more clearly that big businesses built around the PC-industry now face a crisis that has proven slippery for leadership to detect and address with internal consensus. 

News that Intel CEO Paul Otellini will step down in May of next year is another example of how executive leadership must meet the challenge of transitioning into a more mobile marketplace. 
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