back to article HPE lawyers claim Autonomy chief Lynch knew all about 'revenue-pumping' carousel

Former Autonomy chief exec Mike Lynch was "most certainly aware" that his British software company had fraudulently hyped up its performance using a carousel of "revenue-pumping" fake sales, HPE's lawyers told London's High Court on Monday. Lynch had Autonomy buy software and other products from its value-added resellers (VARs …

  1. asdf

    >HPE alleges that around $20m was wrongly added to Autonomy's revenues through these placeholder transactions over the two-year period

    Wait so HPE overpaid by almost 9 billion because of $20m? Seems legit. Everyone in the world was laughing at HPE on the day that deal was announced. Pretty obvious from the get go. I am sure Autonomy cooked the books some but that purchase was a symptom of a broken corporate culture on HP's part.

    1. diodesign (Written by Reg staff) Silver badge

      Wait so HPE overpaid by almost 9 billion because of $20m?

      No, HPE claims it's part of it - it's given examples of alleged inflation so far.

      C.

      1. asdf

        Re: Wait so HPE overpaid by almost 9 billion because of $20m?

        Won't be surprised if they find Lynch fraudulently inflated Autonomy but nobody inflated Autonomy like HP bidding against itself. No one outside HP thought that valuation was sane when the deal was announced.

        1. Chris G Silver badge

          Re: Wait so HPE overpaid by almost 9 billion because of $20m?

          I suspect a lot of the absurd prices paid for many of the dot com takeovers are as much vanity as corporate business acumen.

          ' I've got the money and I want it' kind of thing.

          How many emerging tech companies that were not even that wel established have been snapped up for ridiculous sums of money?

    2. Nonymous Crowd Nerd

      Just $20m

      Might be only $20 million as opposed to billions, but this could be just the tip of the iceberg. This kind of transaction is not easy to prove - neither party is going to be exactly keen to show you the details.

      And if this is indicative of how Mr. Lynch spent his time (when he wasn't spouting about how great he was to the press) it seems pretty good evidence that he wasn't honestly growing the business.

      1. Anonymous Coward
        Anonymous Coward

        Re: What about auto-updates?

        >> that he wasn't honestly growing the business

        I think that's a given at this point. It's about whether the stunt meets the legal standard for fraud.

        HPE were (are?) also idiots and that's a given too. A fool and his money are soon parted as they say.

        But they're trying to save face as much as they can, and that's fair enough.

        1. Anonymous Coward
          Anonymous Coward

          Re: What about auto-updates?

          "But they're trying to save face as much as they can, and that's fair enough."

          HP are trying to pin the blame on Autonomy because otherwise they'll have a lot of shareholder lawsuits heading their way. Whether it's saving face or delaying the inevitable is unclear at present.

  2. robidy

    Seems odd how there is no appetite to extradite him to the US....guess they don't want to swap him with Zuckerberg...

    1. sanmigueelbeer Silver badge
      Happy

      Seems odd how there is no appetite to extradite him to the US

      I hear the embassy is putting up a partition in Julian Assange's room for another occupant. Unlike the current occupant, this one will probably has the cash (lots of it!).

      1. Mark 85 Silver badge

        Unlike the current occupant, this one will probably has the cash (lots of it!).

        And perhaps showers more frequently.

  3. FozzyBear
    IT Angle

    This has been asked before but

    if the figures were so inflated. How was this not picked up in the audit before purchase? There are only explanations in this case. First, complete and utter incompetence on those that did the audit (KPMG wasn't it?) , or they did some discrepancies that warranted further investigation, but HP C suite made the decision to push ahead with the purchase. Regardless there are more than two that deserve to be hauled into court and beaten repeatedly with a couple hard bound law books.

    1. Anonymous Coward
      Anonymous Coward

      Re: This has been asked before but

      Due diligence is usually done within a very tight timeframe - I'm guessing 6 weeks for this.

      If I understand HP's argument, they are saying:

      - a VAR would place a hardware order with Autonomy

      - Autonomy would provide the hardware at below cost

      - the VAR would then provide the hardware to the customer and profit from the markup

      I am assuming Autonomies argument will be that they were providing the hardware as a loss leader for an eventual software purchase.

      As long as this was being accounted for correctly (i.e. everything shown in the books and nothing moved time wise too far forward or back), due diligence is likely to only determine that the return on revenue is lower than expected. It's unlikely to detect that VARs were selling hardware only if it was normal for software licensing to follow 6-12 months behind hardware sales following a PoC. Or if VARs were selling additional hardware over and above that required for Autonomy to pad their profit margins. Or if people leaving because of the acquisition resulted in license sales not completing.

      1. Roland6 Silver badge

        Re: This has been asked before but

        >Due diligence is usually done within a very tight timeframe - I'm guessing 6 weeks for this.

        Whilst the detailed work (drilling down on what is behind the published figures) might be time constrained, HP had as much time as they wanted before they made the offer and so should had done much beforehand with the publicly available information, meaning that the due diligence is more about confirming findings and answering questions raised.

        1. Anonymous Coward
          Anonymous Coward

          Re: This has been asked before but

          "Whilst the detailed work (drilling down on what is behind the published figures) might be time constrained, HP had as much time as they wanted before they made the offer and so should had done much beforehand with the publicly available information, meaning that the due diligence is more about confirming findings and answering questions raised."

          If you are suggesting HP didn't do their homework, then I agree. And hence, much of the responsibility lays with HP if they didn't do it or didn't adequately understand the risks involved in the acquisition.

          My point about limited time was more around the due diligence between the offer and finalization of the deal. i.e. if HP's chosen accounting partner failed to deliver suitable reports in the time given.

          I expect there were failings on all sides - the question is how much of the responsibility lies with HP versus Autonomy or a third party.

  4. Doctor Syntax Silver badge

    "the revenues – one of the key financial metrics that analysts were monitoring"

    Revenue is vanity, profit is sanity. Were the analysts monitoring the right things?

    1. Jellied Eel Silver badge

      Guess not. But a curse of modern times, especially in the US where there's the fixation on quarterly performance rather than longer term, sustainable growth. Again I'm questioning the due diligence because the 'reciprocal transactions' sound much like the good'ol 'swap' deals telcos did during the .Com boom & bust.

      (And sales, bless them. Our bit was some expensive subsea capacity, the swap element was a section of inland fibre that didn't terminate in or near any useful PoPs, or even cities. Had a hard time trying to persuade sales that what the customer was offering was worthless, or would be very expensive to try and get some use from.)

      1. Doctor Syntax Silver badge

        The other thought I can't quite get out of my head about this is that market value of something is what somebody's prepared to pay for it.

        1. Anonymous Coward
          Anonymous Coward

          It’s always looked like HPE believed Autonomies claims that its software was revolutionary rather than just big data analytics with pretty pictures, not realising that there were other solutions out there.

          HPE believed they were buying the next big thing, that paying over the odds didn’t matter because the long term revenue would make up for it. I suspect they even spotted “synergies” with their struggling server business. The board must have loved that....

      2. Milton

        "fixation on quarterly performance"

        "But a curse of modern times, especially in the US where there's the fixation on quarterly performance rather than longer term, sustainable growth."

        The UK has its share of this stupidity, too. (Though perhaps, given that sentiment and greed plays such a part, it is rational if your only interest is to score some cash and run before the house falls down).

        Before and during the bursting of the late 90s bubble, I was (for once) in a salaried post in the City working for a systems integrator and watched with fascination as its board (I was one step below, and of course ignored as soon as I started offering warnings), fixated on a mythical IPO, began bullying clients for payments (relationships rapidly ruined), slashing recruitment and training budgets (staff performance declined), pushing managers to bill hours (so they couldn't 'manage' any more) and cutting any unbillable time devoted to admin, team-building, professional development, etc etc. I vividly recall a very expensive performance & strategy away-weekend where I presented on how my department was realistically, actually going to perform for the next six months, given our pipeline, staffing, skills, training requirements and the exigencies of competent project work, and being met with blank stares since all others had offered a rosy picture of steadily increasing quarter-by-quarter revenues ... exactly what the board had to believe ("because that's what the analysts need to see")

        You can fill in the remaining several months yourselves. Personally I'd have sooner forgotten IPO, kept the team, built up for the long term and grown organically. Instead the company was basically destroyed by its founders' obsession with the short term. Its very name has vanished. (No, I didn't refuse a fat payout, but things could have been so much better for everyone.) All in all it was a fascinating experience watching as the poisoned Kool-Aid spread its effect among previously quite sensible, rational people.

        (The return to contracting/consulting, where I can stay outside of toxic management fads, avoid career structures infested with self-serving halfwits and, best of all, turn my back on office politicians, has become permanent. The coprorate world, I have sadly concluded, is full of greedy, lazy idiots.)

        Not much actual analysis involved, then, is there?

        1. agurney

          Re: "fixation on quarterly performance"

          The UK has its share of this stupidity, too. (Though perhaps, given that sentiment and greed plays such a part, it is rational if your only interest is to score some cash and run before the house falls down).

          Ferranti and International Signal spring to mind.

        2. Jellied Eel Silver badge

          Re: "fixation on quarterly performance"

          ..fixated on a mythical IPO, began bullying clients for payments (relationships rapidly ruined), slashing recruitment and training budgets (staff performance declined), pushing managers to bill hours (so they couldn't 'manage' any more) and cutting any unbillable time devoted to admin, team-building, professional development, etc etc.

          Yep. Been there, done that, have collection of polo shirts branded with companies that are no longer with us. Sadly, I lost my Cisco Powered boxer shorts. I've also puzzled over IPO prospectus (great for insomnia) that suggest massive valuations for companies that are clearly bleeding cash and a long way from real profitability. Markets can be irrational, and as long as the IPO doesn't lie, it's entirely legal to polish a turd.. And also extremely lucrative for the IPO industry.

          Then with existing businesses, there are the other usual tricks.. Acquisitions to boost revenues, glossing over debt and 'synergies' that often fail to materialise. Or cost cutting to inflate profits, but gut the businesses. Make redundancies, business picks up, wonder why you can't attract staff. Or keep customers who usually notice declining services. Or if those reductions or savings are even real. Case in point, the good'ol BBC, which claimed something like £800m in 'real cash' savings, yet continually needs more money.

          So it still suprises me people are shocked when this happens. Autonomy had a fiduciary duty to maximise shareholder value. HP had a duty to perform due diligence reflecting the deal size and premium, especially as it appeared to have been the only bidder. The allegations are nothing new when it comes to business practices, and have been happening ever since businesses have been around.. But the.. excesses of the .Com boom & bust should still have been in the minds of HP's deal team.

    2. Anonymous Coward
      Anonymous Coward

      Software is slightly different as a high revenue on software is easy to convert to profit if you don't have overly high maintenance costs. So you can pump a lot of money into the development of software which might show a loss, however once the product is 'complete', then the ongoing costs are low. Combine this with a subscription model and you have 'eternal' revenues and high profits which can be raised at any time on annual renewal.

      Extremely simplified, I know. However compared to hardware - this has low profit, high cost of sales and the losses on sales can't readily be recovered. Hardware losses rely to a large extent to be recovered by scaling up production and taking advantage of economies of scale by using early adopters to provide momentum to future growth.

  5. David 164

    How does 20 million justify the billions HP wipe of the value of the firm?

    1. Anonymous Coward
      Anonymous Coward

      Because as noted above, this is just an example of an alleged pattern of behaviour and not the only, alleged, deceitful practice being followed. Do that $20m deal six times a year, apply the 10x multiple (actually a bit more than that) that HP appears to have applied to Autonomy's earnings to get the deal price and that's over $1billion straight away.

      1. asdf

        >actually a bit more than that

        There is no math you can do that can possibly justify even half of what HP paid for Autonomy. A incredibly dumb deal done by an incredibly inept CEO who lasted barely a year hired by an inept board. This is not hind sight talking either. Plenty of posters on here even were saying the same thing the day the deal was announced.

  6. Peter2 Silver badge

    Some of Lynch's less temperate emails were quoted by HPE in its written submissions to the court, with Lynch having told Hussain in a row over vacation allowances:

    If I was the CEO and people were asking me to make decisions on vacation allowances then my response would also be a bit intemperate, although instead of telling people to "do whatever the fuck they want" i'd be asking the head of HR or CFO to kindly do their job or resign, should their responsibilities be too much for them.

    1. Anonymous Coward
      Anonymous Coward

      This can be a factor in the management style of the CEO. If staff are given the clarity and freedom to do their job they wouldn't be asking questions they can answer themselves.

      If the CEO likes to micromanage, or doesn't give the freedom to do the job in the first place (or, perhaps, has blown up over a decision being made and not running it past him) then the senior leadership is less likely to make decisions themselves.

      1. Niall Mac Caughey
        Coat

        "If the CEO likes to micromanage, or doesn't give the freedom to do the job in the first place"

        In my last 'permanent', pensionable job I had an excellent, competent boss who was so excellent and competent that he got promoted and replaced by a political appointee who was neither. This one was devoted to micro-managing; perhaps he felt that if he looked closely enough he might learn a little about the subject of which he was so woefully ignorant.

        Of course we all know that breeds distrust and a lack of respect in the subordinates. In my case I asked him in front of an audience if he had ever had a dog. When he agreed that he had, I asked him if doing all that barking himself hadn't made him hoarse. Oddly enough I didn't proceed much further up that corporate ladder.

        Mine is the one with the P45 in the pocket.

        1. FrozenShamrock

          Your story made my day. I'm retiring this week and wish I had seen your bit in time to have used it. I can think of a few managers in my career it would have been good for. Thanks and take the rest of the day off!

      2. Jellied Eel Silver badge

        This can be a factor in the management style of the CEO. If staff are given the clarity and freedom to do their job they wouldn't be asking questions they can answer themselves.

        I blame MBAs. IMHO, a CEO is the tall poppy that faces towards the enemy, ie investors, analysts, VIP customers and sets strategy. If a good CEO has a good executive team, then they have the 'bandwidth' to do that well. If they're having to spend a lot of time micromanaging down the org chart, then they should be firing the people nominally in charge.

        Same with regular managers. Good ones should have plenty of time to play golf in between 'managing upwards'. If they've got a good team, there shouldn't be much to manage. But then they may get comments like "You don't look very busy", or have to listen to other managers complaining about how busy/stressed they are during pointless meetings. But for some reason, the busy/stressed managers are the ones that tend to get promoted because they're spending 12-hour days, clearly dedicated to the business and should thus be rewarded.

        But they're often the micromanagers who make their teams harder, not easier, and don't have the creativity or flexibilty to find ways to make their team work more effectively. And they're also the types that tend to manage upwards, because they're incapable (or afraid) of making the decisions themselves and want the attention/validation of their peers.

        But such is business, and personally I think Lynch's response was appropriate. Me, I'd have been tempted to add the relevant section from the person's roles and responsibilities and ask if they're having problems performing the duties they were hired to perform?

        1. Anonymous Coward
          Anonymous Coward

          Managing Upwards

          >> Same with regular managers. Good ones should have plenty of time to play golf in between 'managing upwards'.

          Many years ago, I worked for a certain big-bliue company where, if I convinced my manager and his manager that I had a good idea, they would "manage upwards" and make it happen.

          Now I work for a company where the response is "you can't do that", "they don't want that", or "wait until there is a (management) change".. Fortunately, if I keep my head down and do my basic job, nobody bothers me.

          But I miss the days when companies like "big-blue" and HP listened to their employees. Remember the "HP-way"?

          I can't imagine the modern descendants of HP lending test equipment to a 25-year old kid with a crazy idea about a "personal" computer....

  7. Anonymous Coward
    Anonymous Coward

    when hp met ok sauce

    These things are like the perfect storm. Crooked company Autonomy bigging up its worth and hopeless executives in HP eager to do a deal and get their bonus. I imagine they tuned out the dissenting voices.

    I think HP were flying around that time but following this it descended into the workforce management era.

    TBH they would have done something else wrong anyway.

  8. Anonymous Coward
    Anonymous Coward

    Not like the yanks sell dogs....

    See Bayer and their purchase of Monsanto....

  9. chairman_of_the_bored

    HP had (has?) form with buying software companies like dogs chase cars. Fun to do, but can't drive them if they catch them...

  10. Anonymous Coward
    Anonymous Coward

    HP still have an issue

    The first accusations was that Autonomy were offering incentives for resellers to buy. That doesn't seem illegal and is common practice. This accusation of circular cancelling transactions is more signifiant but it would require collusion by the resellers and they need to show that the transactions were indeed completely artificial. That at least one of these companies is suing HP for non-delivery of this supposedly articificial transaction as they needed the software concerned for a client suggest that some at least may have some problems. The biggest problem for HPE is that in anycase the net effect of these transactions would be to leave profit unchanged while increasing turnover and sales and reducing margin. I am sceptical it can account for anything but a tiny fraction of the huge overpayment HP made. You could even argue it reduced the apparent value of Autonomy by reducing the margin. The big problem for HP is that they massively overpayed what everyone else thought was reasonable at the time and thaat is easy to show. You can't blame Autonomy for HP making a bad judgement.

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