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Hewlett-Packard Claims Autonomy Cooked Books
Law Technology News
Note: HP paid $11.1 billion for Autonomy. The $10.3 billion originally reported was HP's initial offer.
Hewlett-Packard Co. said Tuesday it will take an $8.8 billion write down related to its purchase of Autonomy PLC and alleged that Autonomy executives committed accounting fraud to inflate the company's value during the sale.
HP acquired the Cambridge, U.K.-based e-discovery and enterprise search stalwart in 2011 for $11.1 billion. In a statement, HP said that "the majority of this impairment charge, more than $5 billion, is linked to serious accounting improprieties, misrepresentation and disclosure failures discovered by an internal investigation by HP and forensic review into Autonomy's accounting practices."
"HP launched its internal investigation into these issues after a senior member of Autonomy's leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP. This individual provided numerous details about which HP previously had no knowledge or visibility," despite acquisition due diligence provided by Deloitte and KPMG, the statement explains.
According to Reuters, law firms for HP included Drinker Biddle & Reath; Freshfields Bruckhaus Deringer; Gibson, Dunn & Crutcher; and Skadden, Arps, Slate, Meagher & Flom, while law firms for Autonomy were Morgan Lewis and Slaughter & May. Business advisers for HP were Barclays Capital and Perella Weinberg Partners, while those for Autonomy included Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Qatalyst Partners, and UBS. (HP spokesman Michael Thacker declined to comment on external representatives.)
Automomy executives Neil Araujo, CEO of the e-discovery division, and Dan Carmel, head of enterprise content management, did not answer messages from LTN today. The news took the overall technology world and specifically the e-discovery industry by storm. The impact for Autonomy's customers and partners could be felt for years to come. Autonomy held 17 percent of the e-discovery market in Am Law 100 law firms in 2011, but that fell to just 4 percent in 2012, according to The American Lawyer technology surveys. (The American Lawyer is published by ALM, which also owns Law Technology News.)
Dechert CIO Michael Shannon said his firm, with more than 800 attorneys, stores 50 million documents in Automony's iManage software. "When I initially heard that HP was buying Autonomy, I was actually pretty shocked, not understanding in what direction Autonomy was going to go, and more importantly in what direction iManage was going to go," he said, in Philadelphia. "With this news, I'm doubly concerned about what's going to happen now."
Shannon added that he found Autonomy's software to be solid, and its price to be expensive yet fair. However, "I don't know how they're possibly going to make this right, which is where my concern is," he added. "I'm worried the money's going to come from somewhere. It may end up inflating our maintenance or license costs."
E-discovery analyst Katey Wood, of Milford, Mass.-based Enterprise Strategy Group, said HP could also be impelled to act on its best behavior. "[Autonomy] had tremendous marketing and sales presences, but they also had the reputation of selling first and asking questions later," Wood noted. "I think probably HP is going to step it up and try as much as possible to keep those customers happy."
Technology research giant Gartner Inc., in its May 2012 e-discovery report, noted that Autonomy is known for good technology and poor service. "Autonomy's technology is rated very highly by many customers: positive feedback includes ease of use, extensive functionality and scalability, as well as a good focus on the legal user. Autonomy has a wide range of products that cover each stage of the [Electronic Discovery Reference Model]," Gartner analysts Debra Logan and Sheila Childs wrote.
But, "Some customers report that support is not responsive, even in the face of substantial deployment or functionality issues, and that their issues are ignored until the are escalated. These customers report that is takes a big effort to get Autonomy to respond. Feedback from clients and prospects indicates that the sales teams can be difficult to negotiate with, that the product is expensive, and that sales is not selling the right solution to the problem," they wrote.
HP's acquisition plan was controversial from the start. When Autonomy went on the market, HP rival Oracle said that it thought the price was overvalued. Consultant Craig Ball at the time said he agreed. "I predict a $2 billion write-down … within five years," he said. (Ball is a Law Technology News advisory board member.) Today on his blog Ball said it "turns out the deal was far worse than even this vocal naysayer imagined."
HP, in its statement, laid the blame squarely on the doorstep of former company executives: "This appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers. These misrepresentations and lack of disclosure severely impacted HP managements ability to fairly value Autonomy at the time of the deal," the HP statement continued. "HP has referred this matter to the US Securities and Exchange Commissions Enforcement Division and the UK's Serious Fraud Office for civil and criminal investigation. In addition, HP is preparing to seek redress against various parties in the appropriate civil courts to recoup what it can for its shareholders. The company intends to aggressively pursue this matter in the months to come."
Overshadowed by the scandal, HP today said it lost $6.9 billion for its fourth quarter of 2012, despite earning $30 billion in revenue. For the year, HP lost $12.7 billion on revenue of $120.4 billion. Whitman said HP is one year into a five-year turnaround plan.