Hardware giant Hewlett-Packard has called in the Serious Fraud Office (SFO) after uncovering what it claims are accounting irregularities at intelligent-search software vendor Autonomy, which it acquired for $11.1bn (£7bn) in August 2011.
The deal, which had been held up while HP underwent one of its periodic changes of CEO, was ultimately approved by new CEO Meg Whitman. Just 15 months after the deal was announced, though, HP has taken a massive $5bn (£3.2bn) write-down on the acquisition. Whitman has vowed to pursue compensation for HP through the civil courts, as well as involving both the SFO in the UK and the Securities and Exchange Commission's (SEC) enforcement division in the US.
In a conference call, CEO Meg Whitman said that the irregularities were only uncovered following the departure of Autonomy founder and former CEO Mike Lynch, when an unnamed senior executive who had stayed on came forward with their concerns over Autonomy's past accounting and revenue recognition practices.
"HP now believes that Autonomy's former management mis-stated Autonomy's financial performance, including its revenue, core growth rate and growth margins, as well as misrepresenting its business mix," said Whitman.
"There appears to have been a wilful 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," she added.
The matter has been referred to both the SEC and SFO, she said, and senior executives at Autonomy will almost certainly be in the line of fire, too. "We are preparing to seek redress against various parties in the appropriate courts to re-coup what we can for our shareholders. We intend to aggressively pursue this matter in the months to come."
Whitman said that HP had undergone a full due diligence process during its acquisition, but had done so relying on audited financials, rather than asking questions about revenue recognition policies and products of Autonomy's management.
Whitman claimed that there were three main ways in which Autonomy misrepresented its sales and financial performance.
The first was with hardware sales reported as software revenues, with the cost of the hardware booked, in part, as a marketing expense to cover up its relatively low-margins.
What those two things did was effectively inflate revenue," said Whitman, "and inflate gross margin. Second, licensing transactions with certain value-added resellers where, in some cases, there was no end user. So the software was sold into the VAR when there was no end user.
"Finally, they converted long-term hosting deals to short-term licensing deals. So, for example, when they bought a number of different companies they would go in and take these long-term hosted deals and turn them into short-term revenue, which had the effect of inflating revenue without the proper disclosures," said Whitman.
All these measures would have had the effect of making the company appear as if it was growing faster than it was, increasing its share value and, hence, its sale value when HP acquired the company.
Lynch, who made about £560m selling the company to HP, "flatly rejected" the allegations of "serious accounting improprieties" made today. In a statement released to Reuters newswire, a spokesperson said: "The former management team of Autonomy was shocked to see this statement today, and flatly rejects these allegations, which are false.
"HP's due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and [advisory and asset management firm] Perella Weinberg. HP's senior management has also been closely involved with running Autonomy for the past year."
Lynch had been ousted from the company within months of the acquisition as Autonomy sales failed to live up to expectations, while senior HP management questioned the company's operational procedures.
According to some reports, HP had sought ways to extricate itself from the acquisition after Whitman joined, including looking for financial irregularities in Autonomy's accounts, but could not at the time find material grounds for doing so.
The revelation coincided with poor financial results from HP, which saw revenue declines in all of HP's operating divisions. Indeed, some observers suggested that the claims of accounting irregularities were relatively trivial compared to the wider problems unveiled by HP today, when it released its fourth-quarter and full-year financial results.
They showed significant declines in revenues in all of HP's divisions, while other analysts noted that virtually all of HP's acquisitions in recent years could be classified as failures.
Today's revelations also throw a sharper focus over the row last year between Autonomy's Mike Lynch and Oracle executives. Oracle's Mike Hurd had claimed that Lynch had been actively shopping Autonomy, but that Oracle had baulked at the asking price of $6bn. Lynch denied that he had actively been seeking a buyer for Autonomy prior to HP's offer.
