The maker of expensive printer ink, HP, was suckered into spending billions to buy an overpriced accountancy software company which peddled vapourware, it has alleged, although Autonomy’s founder has rejected the claims.
HP bought Automony for more than $11 billion, but discovered that the British company’s main product was over-hyped and had to be given away because customers could not use it.
HP CEO Meg Whitman wrote 80 percent of the buying price for Autonomy off, and accused “some former members of Autonomy’s management team” of using “accounting improprieties, misrepresentations and disclosure failures” to hide what the company was doing.
The Autonomy buyout was the cunning plan of HP CEO Leo Apotheker who wanted to dump PCs and hardware and become a software company, like SAP. To Apotheker the Autonomy sale made a lot of sense. Autonomy looked like it was doing extremely well.
HP is now claiming that Autonomy managers used dodgy accounting to accelerate revenue by getting customers to “buy” products now, under terms that really just borrowed from the future.
Insiders have been rushing to tell Forbes how Autonomy was based around dodgy accounting when HP bought it.
Autonomy was founded as Cambridge Neurodynamics in 1991 by Michael Lynch, a Cambridge-educated computer scientist who based his company on some Bayesian search technology he had developed.
IDOL, Intelligent Data Operating Layer, is still seen by HP as pretty good. It is supposed to find all of a company’s data, wherever it resides, and whether or not it can be identified by specific words.
But IDOL is just a fancy search engine and not something you would base an entire mega-company around. From its average technology base, Autonomy grew through acquisitions. It bought storage companies like Iron Mountain and enterprise software firms like Interwoven.
It would then go to customers and offer them storage but structure it as a $3 million buy of IDOL software, paid for up front, and $1 million worth of disk.
While it pushed itself as a top software company many revenuse came from the low-margin, commodity storage business. The IDOL software was given to companies for free, but the costs were shifted around to make it look like they had bought $3 million in software sales.
Autonomy would bolt IDOL and other software onto a company’s existing products and try and convince customers to pay more for “new” products. If that did not work they would halt development in the new company and outsource the support. Extra cash was used to buy more businesses.
In May 2012 Lynch was let go from his role as Autonomy CEO after a significant drop in revenue in the previous quarter. This was probably because under HP, the Autonomy business model, such as it was, could not work.
Lynch is laying low at the moment. HP has handed over details of its forensic accounting to fraud officials in the US and the UK.
So why on earth didn’t HP spot this lemon when it bought it? HP has accused former managers of “a willful effort” to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers.
These misrepresentations and lack of disclosure severely impacted HP management’s ability to fairly value Autonomy at the time of the deal, the company said.
Even calling customers would not have uncovered the problem. Many of them are embarrassed to admit they spent $10 million on software that doesn’t actually work, one HP insider said.
The news is a disaster for HP. Autonomy was being looked to by Wall Street as a way of the company pulling its nadgers out of the fire. It can ill-afford this sort of write off at this point in the company’s history.
Lynch denied the allegations to AllThingsD, and claimed that HP had not contacted him in any official capacity. He said that the first he heard of the allegations were when HP went public, and since HP has been running the company for a year, he said “to somehow admit a $9 billion elephant in the room beggars belief, frankly”.