Victim or fool? Hewlett Packard falls for oldest trick in the (cooked) book



Never invest in something you don't fully understand. Few stocks provide better proof of this old investment saw than Mike Lynch's Autonomy (LSE: AU.L - news) .

From the moment it floated at the height of the bubble back in the late 1990s, Autonomy always struggled to convince it was all that it seems.

Personally, I could never get my head around precisely what it did; a two hour lunch with Mr Lynch some years ago left me none the wiser. Something to do with "search", but though it was easy enough to understand what made Google (NasdaqGS: GOOG - news) such a killer business model, it was much less obvious with the Cambridge (BSE: CTE.BO - news) based Autonomy.

But oh how we cheered when the bearded Mr Lynch managed to defy the sceptics by selling the company for such a humongous price, taking a nifty $800m (£503m) in personal spoils out of the business in the process.

Lesser mortals might struggle to grasp the full, transformational potential of Mr Lynch's creation, but the tech-savvy Hewlett Packard (NYSE: HPQ - news) surely knew what it was doing and what it was buying. As it turned out, it didn't. It was just another over-the-hill corporate goliath looking for salvation in the acquisition of an apparent glamour stock it knew little or nothing about.

It was only a matter of months before HP realised it had bought a pig in a poke, but it can hardly claim it wasn't warned. Larry Ellison, chief executive of Oracle (Xetra: 871460 - news) , admitted at the time to passing over the opportunity to buy , saying the price was absurdly high.

As if that wasn't warning enough, you might have thought the appearance of Frank Quattrone on Autonomy's advisory ticket, not to mention open questioning of Autonomy's accounting practices in the blogosphere, would have sounded the alarm. Mr Quattrone is famous as the techie's friend, the investment banker who can always be relied on to secure a big price. HP was hot to trot, and therefore ripe for a mugging.

I can't say I've much sympathy for this fallen star of the PC market. The first refuge of anyone silly enough to be taken for a ride is to cry fraud. Lots of tech companies are practictioners of creative accounting, but there is a world of a difference between inflated reporting and outright fraud. For the time being, HP's allegations raise as many questions as they answer.

Why did the due diligence fail? Were Autonomy's auditors, Deloitte, as much in the dark as HP? If HP's allegations are even half way true, how on earth did Mr Lynch think he could get away with it? Whatever happened to the buyer beware principle in HP's rush to acquire? And last but not least, is this not all a rather convenient smokescreen for a company which faces acute challenges on multiple different fronts? In any case, it's hard to work out which is worse Mr Lynch's opportunism, or HP's stupidity in falling for it.

Big, publicly quoted companies should ignore the siren calls of investment bankers and stick to their knitting, yet they never seem to learn their lesson.

= Here comes another raid on our pensions =

As if saving is not already being taxed to virtual extinction, it is reported that our beloved Coalition government is preparing to go further still in its hunt for additional sources of revenue by ordering another raid on pensions.

On every level, this is bad policy, so let's start at the beginning. Perhaps I've got this wrong, but I thought one of the Government's major aims was to rebalance the economy away from debt fuelled consumption to savings, investment and exports. Taking another pot shot at pensions doesn't obviously further this ambition.

Are there any mitigating factors at all? Well, it might be argued that this is not about economics, but politics. The Lib Dems won't agree a further freeze in working age benefits unless there is some form of compensating tax on the better off. Wealth taxes, mansion taxes, or new, higher rate council tax bands all these have been ruled out as either impractical, unfair or both.

So if the Government is not to impose a greater income tax burden on higher earners per se, why not just remove some of their tax perks instead? Most earners can only dream of saving £50,000 a year into a pension pot, the current maximum which is exempt from income tax.

To reduce the ceiling to £30,000 only affects a relatively small group of pension savers, even if it yields a fat £1.8bn a year in extra revenues for the Treasury. Why should better off pension savers get a bigger tax break than everyone else?

Like a lot of the great levelling consensus that has come to dominate thinking in our political class, these arguments distort the reality. Yes, it is perfectly true that relatively few people are in any position to save £50,000 into a pension in each and every year of their working lives, or even a substantial part of it. If only it were so, but for the vast bulk of society, income and expenditure is much more lumpy.

Many middle income earners will struggle to contribute anything at all at that point in life when they have young children and a big mortgage. But there are other periods, particularly in the run up to retirement, when expenditure is lower and income is higher, and you might therefore wish to save a great deal more. Lots of people, not just the undeserving few, will therefore be affected.

In an ideal world, all capital accumulation, corporate as well as personal, would be tax exempt. Saving is only a form of delayed consumption; the saver sacrifices consumption today so as to be able to consume tomorrow.

One way or another, the income eventually gets taxed. To do what the Government seems to be proposing is therefore only to steal from tomorrow so as to support spending today. It is small wonder that great tracts of the population are giving up on saving, and that our industries are thereby starved of the capital they need to grow.

Successive British governments have done their level best to destroy a once well oiled system of funded private sector pensions. The present lot have continued in the tradition by already reducing the tax exempt allowance once. Now they threaten to take a second bite at the pensions cherry. Even the City struggles to be as short termist as this.

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