'Brit Bill Gates' defends his honour in open letter to HP board Hewlett-Packard has slapped down former Autonomy boss Mike Lynch after he called for details of accounting charges made against him and for an explanation of what HP executives really knew. In an open letter to PC giant’s board, Lynch effectively accused HP of smearing him by releasing selected information to the media and he …
...Autonomy was a decent business that was probably worth a small fraction of what HP paid for it. HP overpaid because of highly 'ambitious' accounting by Autonomy that they were too stupid to see through, even though bloggers have noted Autonomy's dodginess for years. The accounting shenanigans probably doesn't amount to fraud, and HP are just looking for an 'out' to cover for their stupidity.
Quite amusing that HP think the SFO will sort it out for them. UK based Torex went down through much more rampant accounting "irregularities" in 2006/2007, were reported in February of that year to the SFO, and the Serious Farce Office now hope to have the main perpetrators in court this coming March.
On this basis, HP can expect their day in court sometime in 2018.
I think he has got his head round it.
The whole point of due diligence is to check everything important - every major contract, the validity of prior years results, the assumptions underlying the financials, the quality of the receivables, and the deal pipeline. In a friendly takeover situation you have access to the information to check this.
When you're spending (eleven) giga bucks on something, would you really treat the purchase with the sort of rigour as an Ebay transaction, and take the word of a seller that all is ship shape and Bristol fashion? I don't believe even the clowns of HP are that daft; What they are miffed at is that their own willingness to over-pay has made them a laughing stock.
HP did their due diligence, which hardly reflects well on their valuation and risk management processes. As a previous commentard mentioned, they also wrote down their purchases of EDS and 3Com. Still, we don't know enough to say that HP isn't out of line, so let the courts figure that out.
Well HP says they DID do their due diligence. They relied on audited accounts by Deloitte and then got KPMG to audit Deloitte and neither found anything untoward.
So...either Deloitte and KPMG didn't find something obvious that they should have done or the problems were so well hidden they didn't find them on auditing. If it's the former the accountants are in the sticky stuff. If it's the latter then it's HP's fault for not digging deeper; I guess Meg reckons it's the former.
If you stop and think about this, in order for HP's claim of fraud to hold weight, the corruption would have encompassed thousands of vendors, customers and partners, or the auditors themselves.
I find it extraordinary unlikely this team could have managed such a feat given all I know about them. It's far more likely HP's management team has a broken decision making process ( shock! horror! ), and are simply trying to save their jobs and, more importantly, their egos, by portioning blame elsewhere for their screw up.
"in order for HP's claim of fraud to hold weight, the corruption would have encompassed thousands of vendors, customers and partners, or the auditors themselves"
With all due respect the first half of that is incorrect. And I should know, because I worked at a company where a major accounting fraud was perpetrated, causing it to collapse. A small number of people, probably around five to eight, can easily conduct an accounting based fraud, simply by mis-stating the revenues. Sometimes that's blatant, as in declaring a sale when you've not got one (although the perpetrators usually do so against a prospect that they hope to come good soon after). With software revenues particularly involving either income streams over time, or work streams over time against an up front payment you have to make a call when the revenues become a sale, and this in particular creates an opportunity for a more sophisticated fraud, by claiming revenues today for work that you will only do in the future, or claiming a future revenue stream as though it were earned when the contract were signed. Customers can't see any of this, and there's no reason for them to be involved. Suppliers wouldn't know enough (and software businesses usually don't have many suppliers compared to a manufacturing or retail business). The only people who should see enough to know are the auditors, and that that's why they are required by law. It helps if the company structure is complex, and if the finance team is under-manned and with high staff turnover (this means nobody outside the core "fraud team" stays long enough to see that the numbers are made up).
Problem is that in my experience at a couple of different companies, the auditors will sign off all manner of dodgy things, rather than rock the boat with a major client. Enron, Worldcom, and other big bankruptices were mostly due to a fraud involving the over-statement of results - but both had no problem getting their accounts signed off until the fraud had escalated to the point that the entire company went under (hence Arthur Andersen's demise). And so it was for the company I worked at - accounts signed off by the auditors in May, and by December the wheels had come off. It wouldn't take much for the auditors to properly check the sales ledger against contracts in place (and verify with major customers), nor for them to validate booking of revenues where there's a timing element. I don't think that the major auditors are ever complicit in fraud deliberately - unfortunately they tend to be persuaded to overlook the signposts to fraud in order to protect their relationship. And even if the company does go belly up, the auditor will charge even more for helping the administrators and creditors, so the downside of a client bankruptcy is usually limited.
Then they are a part of their con, albeit unwittingly. Which doesn't absolve them of guilt. Indeed, that it was implicit fraud based on their own incompetence should make it worse, in my opinion.
My point was, however, that Autonomy can hardly be blamed if they got a clean bill of health prior to being sold. If the purchase was based on crap financials ( which I have no problems believing is the case here ), the only culpable party is the company making the purchase.
I would *love* to see HP sue itself, but I suspect that wouldn't be good for the bottom line.
"in order for HP's claim of fraud to hold weight, the corruption would have encompassed thousands of vendors, customers and partners, or the auditors themselves"
No, it doesn't. All it takes is for one or two people to record a regular sale while also having a side agreement with the customer that you will let them do a return or refund, or will buy an equivalent amount of the customer's product, etc. Repeat this enough times to make the number for the quarter, and you're there.
This has happened enough times (3COM, Sunbeam, etc. etc.), especially when you have a domineering, aggressive CEO with a big ego who is willing to do anything to be seen as "the next Bill Gates" and maintain his or her ego.
Sure, HP grossly over-valued Autonomy too, but that doesn't mean their charges of fraud are automatically wrong. Both things can be true at once.
If there really *was* a failure in due diligence, and it sure as hell sounds like there was, then surely HP should be taking aim at KPMG and Toilette and Douche ...
All that said, HP do have a fair amount of previous in the 'monumentally expensive fuckup' stakes (EDS and Palm, to name but two)
I worked for a US Nasdaq-listed company that's still around (just!) and they serially overpaid on a string of acquisitions. In each case my employer's inward-looking and insular management culture would then get to work destroying the new acquisition and rendering it close to worthless. I don't know if that's what happened with HP and Autonomy, but it's one explanation.
Both are really somewhat unpleasant given events, editorials and comments. As some have said, this legal process will take some years to unravel and will cost a bloody fortune. As for Mr Lynch demanding information, my knowledge of legal process tells me he and his lawyers will see any plaintiff documents or evidence provided by HP in any claim made against him. To be honest, neither party will come out of this smelling other than like a sewage treatment plant. Let battle commence..!
HP's maths isn't wrong; the $3bn-ish between the value overstatement and the total writedown is due to the sizeable reduction in the HP share price since the Autonomy acquisition. Presumably at least some of the cost of the acquisition was paid in the form of HP shares.
HP, what a sham of a company. They have the worst board on the planet. HP has become synonymous as a den of uneducated crooks, and thieves. We are out of the hardware business, and into the software business. Oops! Wrong. We are in the hardware business trying to build up the software business, but just bought the Palm phone business. Rats, we trashed Palm, the phone business, and bought a software business. Nuts, the software business is nothing but code on paper not worth much really. Hmmm, Did I say we still make crap hardware? I would love to run the company for one week. I can guarantee a roller coaster ride with excellent results.
Master Rod
"HP announced last week it would take an $8.8bn writedown on the 2011 $11bn cash purchase it made for Autonomy..."
This is like buying a £200,000 house and finding out its only worth £40,000. This must be some sort of scam to avoid paying profits out to shareholders. Or the entire HP senior management board are completely incompetent.
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