Regulators looking at technology companies should not be a cause for excitement. The eagerness with which the SEC cries foul, bolstered by an ambulance chasing legal system makes this kind of event almost banal in its ordinariness. But when the UK’s Financial Reporting Council decides to have a poke about (registration required) then it is a little different. Such is the case with Autonomy, now owned by H-P but the subject of much chatter following a massive write down in the goodwill that H-P paid. A brief potted history:
- In 2011, Leo Apotheker, then CEO of H-P needed to place a big bet. He saw the acquisition of Autonomy as representing an opportunity to switch gears at H-P, turning it into a software and services company with some cloud credibility thrown in for good measure.
- Autonomy bargained hard, despite rumors it had been on the blocks for some time, and H-P eventually poneyed up an eye watering $10.5 billion.
- It quickly emerged that H-P directors were not happy about the deal and that, along with a general dislike for Apotheker among the Silicon Valley tech wonks led to his ouster before the deal was finalized. Side note: I felt at the time Apotheker was somewhat unfairly treated. As we shall see, I was probably right.
- Sometime in the March-April 2012 time frame, relationships between H-P and Autonomy’s management blew up and Mike Lynch, Autonomy’s founder was fired.
- In November 2012, H-P took a massive $8.8 billion hit on its Autonomy acquisition. In effect, it was saying to the market – we screwed up.
- Not content with taking its own mis-steps on the chin, H-P accused Autonomy of serious accounting improprieties. Meg Whitman, Apotheker’s replacement as CEO H-P flailed around, pushing all the blame on the Autonomy management. Among other things, she said the company had asked the UK’s Serious Fraud Office to take a look.
- Needless to say, the ever pugnacious Mike Lynch fought back hard, reiterating that Autonomy’s auditors had given it a clean bill of health for many years.
Whichever way you look at it, and given H-P’s thinking that the write down was justified, H-P look like a bunch of idiots. They have a poor acquisition track record. This image from Business Insider:
The image is taken from a presentation by Jim Chanos, well known for sniffing out stocks that are weak and dubbed King of Shorts.
FRC weighs in
The fact the FRC has got involved suggests there are at least grounds for believing the auditors may not have done as good a job as Lynch claims. It is interesting that the FRC is conducting its review in conjunction with the ICAEW, the trade body for British chartered accountants. I suspect that those who look at these things in more detail will be suspicious of this joint review on the basis that trade interests will get in the way of a trustworthy outcome. If the FRC determines that irregularities occurred then it opens the door for an SFO led prosecution.
That still leaves the question of whether Autonomy was engaged in a ‘fraud.’ Prior to acquisition, there were plenty of questions being raised about Autonomy’s accounting and the company was behaving particularly aggressively against analysts who raised pointed questions. Some claim they were shut out, a frequent tactic when companies don’t like what they’re hearing.
The FRC review is being restricted to the period January 2009 to June 2011. That was a time when Autonomy made a number of acquisitions including Interwoven, the Information Governance business of CA and Iron Mountain. It is also the period during which margins grew from 30 percent to 40 percent and which H-P wants investigating and when analysts were particularly concerned.
When a technology company makes a lot of acquisitions, there is always the potential for confusion. For instance, during the last three quarters, it has been difficult to fully understand how SAP’s acquisition of SuccessFactors is truly playing out. No-one is suggesting that SAP bought into a fraud, although questions have been raised about whether the price was right.
Confused? You’d not be alone. When you look through this saga there is a considerable amount of ‘he said/she said,’ made more complicated by the clear implication that H-P didn’t undertake enough due diligence or was prepared to short cut the process in its haste to cut a deal. None of that takes away from the potential for financial shenanigans. More to the point, should buyers lose confidence in software companies, especially those that are acquired?
As Chanos points out, H-P has a dreadful acquisition history. Things are so bad at H-P there is now talk of it being broken up but then not everyone agrees. From a stockholder’s perspective, Oracle has a very good acquisition history, as does Infor. IBM is turning its acquisitions to good effect. The question all buyers should ask is whether an acquisition provides good value in the post acquisition period. Given that Autonomy is addressing topics that are important to larger enterprises there is little to fear, provided of course that the acquired technology still delivers.