Former HP CEO Léo Apotheker tells court he didn't read Autonomy's latest accounts before fated $11bn buyout Former HP CEO Léo Apotheker has claimed that if controversial British software company Autonomy's accounts were accurate, "I doubt that HP would have pursued an acquisition of Autonomy at all" – even as he admitted he himself hadn't read its quarterly results before getting HP to buy it in 2011. Apotheker's bold claim, made in …
Not reading even the publicly available documents with a fine tooth comb of any company you are interest in is exactly how you get fired as a CEO after only a year. Was he trying to use his golden parachute from day 1? My CEO who has built our company up as a powerhouse over decades and presided over many acquisitions is the type who can't get enough documentation to read. I can almost guarantee the guy reads the financials of every sizable company in our industry as a matter of course anyway. Gross incompetence by HPE.
Depending on the corporate structure thats a crass but not unreasonable statement if following UK good corporate governance where there is a both a Chairman AND a CEO.
Its the chairmans job to set broad direction and manage the CEO. It's the CEO's job to manage the company and its performance to those directions.
If this is a US company where the head honcho is both Chair and CEO - then the suit is deserved.
Many years ago I worked within the Corporate IT of a large PLC. Speaking to board level directors on a daily basis you get to know how brilliant these people are but also an instinct when someone has been promoted beyond their capabilities. It's called the Peter Principle. Since this case came to light I have believed that this has been the case and rather than admit their negligence, HP have pursued this path that Autonomy were criminally liable in order to prevent them being sued to bankruptcy by their shareholders. I'm certainly not exonerating Autonomy but It'll be interesting to see how this case plays out in the High Court where the US govt holds no sway.
"in order to prevent them being sued to bankruptcy by their shareholders"
Given that the shareholders are the company this is always something that puzzles me. It would be reasonable to sue the board, CEO or whatever as individuals. Suing the company company is suing themselves. It's simply a job creation scheme by lawyers but why do shareholders indulge them?
That's what Warren Buffet does. You'd think he'd have a fancy big building but he has one floor of a modest building. The last time I looked he still didn't have a computer in his office. Instead, he says he just reads the financials of a company to decide on when and when not to buy.
One of the things Warren Buffet said during the dot-com bust was that he'd avoided a bunch of dodgy companies because he simply didn't understand what they did. And he only invests in stuff he can understand, so as to try to avoid utterly fucking up.
But he also avoided a lot of the market darlings because he said he read their financial reports. He looked for where the cash came and went.
Accounting is as much an art as a science at high levels. There are often quite large transactions that can be recorded in various ways that are all correct, and picking the right one should be about giving as accurate a statement of the company's position as possible. But there's often no perfect way. However there's often a wrong way, where you can move profits deliberately to pimp your current results, knowing that your future ones will now look much worse - which easy to get away with if you're in a high growth industry and can cover your sins with future growth - or a sale to some other poor schmuck before it shows up.
But short of the outright fraud that seems to have happened at say Patisserie Valerie, what you can't hide is the cash going in and out of the business. If more cash is going out than coming in, then something is probably very wrong somewhere. The auditors have a much easier time of checking the cashflow than they do of making sure profits in multi-year deals get put into the correct year. And that's why yould should closely read the financial reports, for clues of those kind of shennanigans.
Remember Amazon and Groupon? Both reported profits in their early days, by inventing strange new accounting metrics. As I recall Amazon were doing things like counting buying stock as investment, that could be spread over multiple future years - and that way they could hope to attract investors. I think the SEC even rapped Groupon over the knuckles for doing this in the run-up to their IPO. The difference was Amaazon had a decent cashflow and a viable market, and were deliberately sacrificing current profits, to grow future market share so they could make huge profits later. Ironically they subsequently went to great effort to avoid making any profits for the next 15 years...
and given that they weren't buying it just for it's absolute value, but its potential then that 8.8% should probably have been quite a bit bigger.
An earlier Reg article on this case gave us that figure, $17bn.
Back in August 2011 when HP was about to buy Autonomy for $11bn, the US megacorp “valued it at that stage on a standalone basis at some $9.5bn but together with synergies at $17bn.
On that basis, 13.6%.
Really true, given how long it stayed as HP CEO.
Anyway, Apotherker is the model for the late XX/early XXI CEO - unqualified, probably well connected, looking for bonuses, stock options and golden parachutes, offloading any real work to underlings - then blaming them for his mistakes.
Apotheker's testimony looked like it was rapidly descending towards a playground level argument near the end.
"Well... well maybe I didn't have time, okay? Running a company is HARD! I don't see YOU running any multinational businesses, so where do YOU get off telling me how do do my job, huh? Huh? Huh?"
Somebody at the helm of a company I worked for back in the day had an argument with the head teacher of their daughter's school. I don't remember what the argument was about but I do remember his description of the outcome. He wasn't one to be DYKWIA normally and very down to earth. However the headmistress had done something involving his girl that had annoyed him. Head teacher had ended the call with a slightly sarcastic question as to what experience did this parent have running an educational establishment? He shot back that he was on the board of trustees for a university and a governor of a school. He said the line went very quiet and she said something along the lines of yes well I'm afraid I can't change anything now.
Even if he did read the most recent numbers, do you think that would of changed the outcome? Maybe, but I don't.
Considering this "deal" was put together in the middle of the "Web 2.0" hype and SaS was supposed to be the dreamy future, Autonomy just had to put the proper stamps and titles on the box and HP would of bought it regardless.
At least this can be used as an example on what not to do. I forget which, but some company used this Autonomy deal to state it is better to buy 11 one billion dollar companies instead of one 11 billion dollar company... can't disagree.
"At least this can be used as an example on what not to do. I forget which, but some company used this Autonomy deal to state it is better to buy 11 one billion dollar companies instead of one 11 billion dollar company... can't disagree."
Buying 1 x $7bn company for $11bn is likely to be just as bad as 11 x $700m companies for $11bn. Either way, you're paying a significant premium.
I believe (pending HPE's details of actual fraud occurring) Autonomy could have been a functional purchase if due diligence had been carried out AND a sensible price had been paid (i.e. the ~60% markup was not justified).
Although, more than likely, HPE would have walked away unless the price was much closer to the market valuation or Autonomy may have walked away if HP's offer was significantly reduced.
"Although, more than likely, HPE would have walked away unless the price was much closer to the market valuation or Autonomy may have walked away if HP's offer was significantly reduced."
Sure, those numbers would influence decisions assuming everything was legit... but then would we be here? I still wonder if Autonomy never sold to anyone, would there of been a whole ship of fools sinking into a prison?
"I still wonder if Autonomy never sold to anyone, would there of been a whole ship of fools sinking into a prison?"
Autonomy had been shopping for a buyer (they had previously approached Oracle) and based on acquisitions and assets, they were worth something north of US$3bn. Based on an annual profit of around US$373m (i.e. the 2010 numbers), that adds something in the order of US$2bn assuming the 2011 numbers continue to show growth, so there's a solid US$5bn there.
Where things get a little murky is in their use of goodwill - they had recorded around US$3bn of goodwill in 2011, I suspect a significant portion of that came from their ~$2.5bn in acquisitions to cover the difference between what they paid and what those acquisitions were actually worth to the company over the preceding ~10 years. I suspect there may have also been some legitimate inflation of the goodwill to avoid asset strippers given they had US$1bn in the bank, but that's speculation on my part.
That gives around US$8bn in value for a company that was valued at US$6.8bn by the market AND there was speculation that Autonomy's growth in 2008-2010 was not sustainable. i.e the publicly available numbers needed careful review.
Now for the really fun bit. HP buys a US$6.8bn company for US$11.7bn and then takes a charge of US$5bn for the acquisition and US$3.3bn for the impact on share price. So once the one time charge is applied, the value is very close to what the market thought Autonomy was worth (i.e. US$6.7bn), the HP valuation was "optimistic" and it appears HP didn't allow sufficient time for due diligence before pulling the trigger.
But it was fraud discovered post-acquisition that caused HP to lose out....
> Even if he did read the most recent numbers, do you think that would of changed the outcome? Maybe, but I don't.
Absolutely. These are classic examples of 'red herring' questioning, beloved of lawyers.
It's irrelevant whether Apoteker read the accounts or not because the allegation is that the accounts were fraudulent and therefore reading them wouldn't have changed his decision.
The allegation that the deal was "all about the synergies" is a red-herring. Of course it was about the synergies: no company decides to buy another just because they have a nice set of accounts.
If there were a jury present they might be bamboozled - but there isn't and the judge won't be.
Does that mean that HP are completely happy with the financial reporting up until 2010? If so, it significantly narrows the time window for potential fraud to under a year, and therefore who potentially knew about it or if it is systematic or just the actions of rogue individuals.
We now appear to have repeated examples of HP's incompetence or lack of due care (you decide which) - I guess HPE are keeping the details of fraud for later in the trial?
Or is this going to turn into a ~9 month technical defense of whether Mr Lynch is suing the correct entity? Because the way things are going, I wouldn't be surprised if HPE's key strategy to prevent paying Mr Lynch was to sign over HPE to Mr Lynch and stick him with the legal costs.
A major acquisition should be reviewed carefully at the CEO level to make sure all the details are correct. This includes reading the required financial reports of a publicly traded company. Leo should reviewed them personally and any questionable items asked his flunkies to dig into them for more detail. Also, it appears Leo was not willing to walk away from the deal not matter what. A smart business leader knows there are times when the best close is to walk away from the deal. There is village missing its idiot.
| Everybody [not] working [in management] at HP at that time got the idea at the very 1st virtual meetings with Leo, why SAP was more than happy to let him go.
Years before this debacle when I was at HP, a senior manager left HP to be CEO of another company. At the time, those who knew the manager said, "The intelligence of both companies have just risen!"
Hard to say who's right based on what we (the public) know, but that's why they're in court.
Reminds me of a contract a company I used to work for was about to sign. I was but a lowly sysadmin, but somehow I got hold of a copy of the proposal, which included the potential vendor's financials. Legal had taken it apart, Finance had given its blessing, and the CFO was about to sign the contract.
However, I discovered that the vendor had added a significant amount of (one time) incidental income to its annual revenue forecasts. Hours before the signing event I notified my manager, who shot it straight to the top. The signing ceremony was promptly cancelled...
Waiting for Apotheker to give me a ring. Reviewing docs is kinda fun. ;-)
Once me and a colleague were sent to assess the products of a company which was being acquired by the one I was working for. They thought they could replace their aging AS/400 products with a new Windows-based product line (it was ca 2001).
We reported that their products were obsolescing, very hard to maintain, full of design issues. They were originally written for VMS, and later ported to Visual Basic somehow. We recommended to stay away.
Manglement decided it was worth it because they would have acquired their customers anyway. They proceeded with the acquisition, just to discover soon customers were leaving, those who were not suing, at least. Their own customers didn't want to migrate to the new software, nor it was compelling to new ones. Those who sold a company without a future made the deal...
The botched acquisition put the company in troubles, and a couple of years later we were "let go" in a cost cutting attempt because among those developers "paid too much" (they called in an IBM exec to do it) - they kept only the cheapest (and less skilled) ones which could barely attempt to fix some holes until the whole boat sank - with the same manglement still at the helm....
I wish I could see them at the bar answering "did you read the report?" <G>
I once had to review a trading system as a consultant, and it was, well, my opinion and that of a colleague were not really suitable for print. Let's say bad, leaning towards atrocious in all the wrong places.
You can thus imagine my surprise when I ran into another client a while later who mentioned they were looking at this system "on the strength of our recommendation". It turned out the enterprising chap who ran this bunch of misfits had stone cold told our client that "we had already reviewed it" - thus giving the impression it had our approval. I told my client he would be better off talking to the director in charge of that project, and set up that meeting straightaway (quite a fun phone call to make as our directors have a sense of humour and it's fun to pass on the message without saying anything that might give the game away).
Client happy we saved them from the deficiencies in both quality and ethics of this outfit, ethically challenged company not so much as they ended up talking to the legal team and, if I recall correctly, folded not too long after.
Most of the reviews I've done were reasonably straightforward from a tech perspective, and even the legal angle isn't always that much of a pain. It only gets dicey when agendas clash, which is why facts matter and interpretation much so.
Gathering breath, he said: "Neither. You're not running HP all by yourself. People look at the numbers, people have followed the quarterly results, [they] told me they were perfectly within expectations. The reason why you read the annual report is the one you indicated early on, it contains notes."
Both, rather than neither, would have been an engaging and exciting answer to follow. I suppose then we're all into Prime Proprietary Intellectual Property and Top AI Trade Secrets Territory.
Quite whether an Enterprising Fit for HP Tomorrow is a question which only they can deliver or fail on ...... for things have moved on considerably into some extremely rewarding territory which leaves everything unpleasant incomplete and misformulated behind .
What a surprise.
"I have strategic vision. Autonomy is the future. Who cares what the numbers look like"
Ahole.
The only people dumber than HP for hiring him are the people who have employed since knowing he bought Autonomy for a stupidly high price which everyone (but 'ol Leo) knew was a stupidly high price.
The very model of what a PHB is.
There's also the issue that, having read one report himself, he didn't read the next one.
If it was a minion's task to read and digest the reports, he needn't have read either. If it was his job to read the reports, he should have read the next one.
He can't logically claim to have no time to read reports if he'd wasted time reading one he needn't, and he would have made more time to read the next report if reading them is what he should have done.
So, are we close to case dismissed? As it seems this case has been going on a whike now, I half fancy that the judge would be quite happy to finish it here and now.
I am the very model of a modern chief executive
I've informatiion, product sales, financial and defective
I know the reports annual and quote the sales historical
From 2010 to 2010 in order categorical.
I'm very well acquainted, too, with matters mathematical,
I understand equations both the simple and quadratical
About accounting theorem I'm teeming with a lot o' bull
Including why it's not my fault I've gone and bloody lost it all.
CHORUS (repeat):...Including why it's not his fault he's gone and bloody lost it all...
...With apologies to the great G&S...
Sometimes the financials really don't matter at all.
In 1996, Apple Computer bought NeXT for $429 million. On paper it was far too much for what was essentially a failing software company.
Except it turned out to be the thing that made people stop talking about Apple dying, and turned Apple into one of the biggest tech companies in history.
429 million doesn't usually buy you one of the greatest CEOs in history when you purchase a company (too lazy to look but guessing they paid a big premium just to make sure he was part of the deal or deal probably doesn't get done). If that one man didn't come along in the deal then all that tech would have largely died in the 90s (probably along with Apple as well) and be nothing but a trivia question. HP did not buy Autonomy for its employees as is pretty blazing obvious.
In 1996, Apple Computer bought NeXT for $429 million. On paper it was far too much for what was essentially a failing software company.
I'd have said NeXT was as much a hardware company as Apple.
Tim Berners-Lee's NeXT cube is on display at the Science Museum in London, I saw it last week, I'd never realized how big that cube was.
This is something I thought I'd never say but the he probably thought that the quality of UK financial data was at least as accurate as that in the USA, which is saying something. But there appears to be a common thread through more established industries and indeed reaching a international quarterly qualatative reporting standard on information, law, finance and accounting. #onelove
In the movie of this fiasco, the real hero of the story will be the lowly teaboy who storms in at the last minute just as they are putting pen to paper to sign the deal and shouts "Noooooooooooo......." in slow motion, spouting that it's a really bad deal. But unfortunately he is ignored as he's just the lowly tea boy right? And that the arrogant slimy and well suited finance and legal bods know best? But in reality, he's like that janitor bloke in Good Will Hunting and in fact a business genius who is shagging that cute but annoying English chick who can't sing - Minnie Driver I think it is.
In the final scene of the movie, he's wheeled out in front of the court and he has to explain how he's such a business genius and knew what everyone else didn't - and it turns out that his dad once beat him up which forced him to retreat into a lonesome world of GAAP books, with a dog probably, and Minnie Drivers albums for his only human voice companion (just to break the 4th wall here : thankfully it was only the first Minnie Driver album, as the subsequent two are fucking awful - but strangely enough, produced by Neil Finn whom I thought would have had more class, ho hum!!!). In the end our lowly teaboy gets given a writing credit on the Mike Lynch and the Waterboys new comeback album and lives happily ever after.
HP get shafted BTW, and everyone laughs at them (again).
What a shame....HP taken down by two CEO's who were incompetent and only cared about personal wealth and wealth of shareholders...that's all ANY of this is about. Leo had a vision to transform HP into an more nimble information type provider with software at it's core, much like how EMC pivoted from pure storage to an information company. He was weak in that he didn't take more of a personal role and left the review of the acquisition to his lieutenants....
As for Meg, we all know and saw her legacy...it was ALL about the stock price and numbers for her...a rudderless ship in terms of mission statement and direction....I can't tell you how many of my customers asked me what our direction was because they could not tell what Meg was trying to do...
So what if Leo didn't read the latest reports. A forensic accountant needs to demonstrate that Autonomy misrepresented its earnings according to accepted accounting principles, or not. End of. A lot of you are quick to jump on the smash-Leo bandwagon (and i was at HP then, and thought Leo was an airhead) but there have been so many high-profile accounting scandals in the UK Plc environment in the past few years, yet their books are regular audited by the so-called experts in the Big 4 ....who dont catch these things (or are maybe compliant about it so they dont lose their consultancy megabucks by being "difficult" ??).... even today's BBC news highlights a call for the break up of the Big 4 accounting firms from an audit vs consulting perspective.....so if the so-called experts aren't calling out falsification, why expect a propeller-head like Leo to notice? You lot are conferring a lot of wisdom on him, and all CEO's , that is not entirely warranted.
I somehow had previously come to the understanding that CEO and CPA were two different thing. Was I wrong?
So he read the 10K. Goodie for him. Did he have the technical chops to parse a marketing piece designed to hide bad news? If he had any intelligence at all, he would call his CFO in and ask him what HE thought about it.
I understand that many CEOs in fact DO come from an accounting background. That would be great if a company was doing a lot of M&A. But that is not the first job of a CEO, despite the certainty of the many, many CEOs we apparently have here are saying.
The first job of the CEO is to be the public face of the company. If they can't handle the analysts call, they are gone, and very, very fast. That is a very different skillset.
Warren Buffet attributes his success to only investing in companies he understands? "Attributes his success" means "says that most people don't". Think that through.
Of course, the second job of the CEO is to hire the rest of the C-suite. The fact that this particular ex-CEO did not hire someone to prep him for this first-year question speaks very poorly for his abilities as a CEO, but that's not really the point of the trial.
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