Clouds roll in over HP and 'great British success story' Autonomy



Hewlett Packard (NYSE: HPQ - news) 's acquisition of Autonomy (LSE: AU.L - news) has been a headache from the start, but new revelations threaten to turn the takeover into an outright disaster.

Larry Ellison, the founder of Oracle (Xetra: 871460 - news) and America's third-richest man, does not need an invitation to blow his own trumpet. On Tuesday, he may have been itching to.

Ellison got into a public row with Autonomy founder Mike Lynch in September 2011 over whether Lynch (AMEX: LGL - news) had tried to sell Autonomy to Oracle and what the UK software company was worth.

Ellison insisted that Autonomy had been "shopped" to Oracle and was wildly overvalued. The spat made troubling reading for shareholders in Hewlett-Packard, which had agreed just weeks earlier to pay $11.1bn (£7bn) for the high-flying UK technology company.

Wall Street was anxious about the price tag HP hung on Autonomy from the moment the deal was announced on the afternoon of August 11 last year.

Leo Apotheker, who had recently joined HP as chief executive from German rival SAP (Xetra: 716460 - news) and was the driving force behind the purchase, was repeatedly asked about the price on a telephone call with analysts that night. The concern was understandable.

HP was paying an almost 80pc premium for Autonomy and 34 times the software maker's projected revenues for 2011. Less than six weeks after defending the price, Apotheker was sent back to Germany by HP's board. Although the purchase of Autonomy was not the only factor behind his abrupt exit, the boat load of cash he had sent across the Atlantic (Frankfurt: 640218.F - news) to Autonomy's shareholders was chief among them.

Six (SNP: ^SIXY - news) months later Lynch, who pocketed about $800m from the sale of Autonomy, was ousted from HP after what the Californian company described as a "disappointing quarter". But, if troubled was then the most popular word on Wall Street to describe HP's acquisition of Autonomy, that changed yesterday. The allegations by HP that Autonomy misrepresented its financial results had analysts reaching for new vocabulary.

"The issue people will be concerned about at HP is 'what's going on at this place," said Brian White, an analyst at Topeka Capital in New York. "The news about Autonomy will definitely create more scepticism about HP."

Shares in HP plunged 10pc yesterday as investors reacted with alarm to the allegations HP made against the management of a company it has touted as a central part of its future. Among the accusations, HP claimed Autonomy recorded less profitable hardware sales as software sales and was booking as revenue sales made to re-sellers of its software, rather than final customers. Lynch denied the allegations.

"It is shocking that HP didn't spot any of this in the due diligence process," said Paul Morland, an analyst at stockbroker Peel Hunt. Mr Morland, who has raised concerns about accounting practices at Autonomy since 2009, said that he sent an email to HP's investor relations department after the acquisition was announced in 2011 to highlight his worries.

Meg Whitman, the former chief executive of eBay who was parachuted in to run HP after Apotheker's departure, insisted that "we did a whole host of due diligence".

As accusations flew between HP and Lynch across the Atlantic, few were disputing the logic that first prompted the world's biggest PC maker to take a bet on Autonomy. The UK company's software is highly regarded for its ability to sift through and order what is known as "unstructured data", which covers voicemails, emails and information posted on social networks. Given the explosive growth of digitised data, the need for companies both to structure and potentially to profit from such data is growing. For HP, a company that amassed its fortune selling PCs and whose attempt at building tablets has misfired, the chance to secure a slice of this software market was irresistible.

The Autonomy deal ushered Whitman into the top job at HP but now, just over 12 months on, the acquisition is becoming an ever more serious headache as she grapples to revive HP's fortunes. The writedown leaves HP staring at a $6.85bn fourth-quarter loss, and the company's overall revenues are still falling, missing Wall Street's expectations last quarter.

In October, HP lost its crown as the world's biggest PC maker to Chinese rival Lenovo, while the US company is cutting 29,000 jobs in a bid to save costs. "[The Autonomy problem] is something that comes on top of everything else," said White of Topeka. "It will be a lengthy legal battle."

On a conference call on Tuesday, Whitman described Autonomy as "in many respects a great British success story." The gravity of the accusations against the company's former management have left a serious cloud over that claim. But they also make Whitman's effort to ensure HP can once again become an American success story that much harder.

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