HP's woes persist as Autonomy deal goes bad

Computerworld - Hewlett-Packard says it will aggressively seek recompense for alleged fraud on the part of U.K. software vendor Autonomy, which HP acquired in a $10.3 billion deal last year. HP said accounting improprieties by Autonomy were to blame for the bulk of an $8.8 billion fourth-quarter write-down it took last month.

The allegations prompted an intense exchange of charges and countercharges between HP officials and Autonomy founder and former CEO Mike Lynch. Lynch proclaimed his innocence in an open letter to the HP board last week, and HP quickly returned fire.

Declaring that he "utterly rejects all allegations of impropriety," Lynch said, "It was shocking that HP put non-specific but highly damaging allegations into the public domain without prior notification or contact with me."

Lynch also challenged HP to explain how it determined that the alleged fraud accounted for more than $5 billion of the write-down.

HP, meanwhile, said that it had shared the allegations with the U.K. Serious Fraud Office, the U.S. Department of Justice and the Securities and Exchange Commission's Enforcement Division. "We will defer to them as to how they wish to engage with Dr. Lynch," the company said.

HP also said it "will take legal action against the parties at the appropriate time."

The acquisition, completed in October 2011, was roundly panned by critics who believed HP paid too much for the vendor of enterprise data management, search and archiving software. HP now acknowledges that Autonomy was overvalued, but it blames the alleged accounting fraud for its inability to accurately assess the company's worth.

Facing tough competition in the server and PC markets, HP had hoped the high profit margins and steady maintenance revenue associated with Autonomy's software products could give its balance sheet a quick boost.

Some HP officials touted the move as a signature accomplishment of then-HP CEO Leo Apotheker, whose brief and tumultuous tenure ended a month before the deal closed.

Apotheker says he was "stunned and disappointed" to learn of Autonomy's alleged wrongdoing.

"This will take a long time to work through, but we're committed to seeking redress," current HP CEO Meg Whitman said. "I'm expecting this is going to be a multi-year journey through the courts."

"The two people who should have been held responsible are gone," she said, referring to Apotheker and former HP Chief Strategy Officer Shane Robison. But now, she added, "I feel good about the stability of leadership" at HP.

Whitman said that the HP board approved the deal based on Autonomy financial documents that had been audited by accounting firm Deloitte. "In the end, you have to rely on audited financials, and we did," she said.

Tony Byrne, an analyst at the Real Story Group, said HP could have avoided the mess by talking to Autonomy customers prior to the deal. If HP had made an effort to meet Autonomy users, he said, "they would have found unusually disgruntled customers -- even by enterprise standards."

Byrne also noted that some Autonomy technology is old and in need of an overhaul. "It was HP's very difficult job when they acquired it to make a big R&D push and turn a lot of these platforms around," he said. "I think they hesitated a little, and this is another pretty big dent in things."

Kanaracus is a reporter for the IDG News Service.

This version of this story was originally published in Computerworld's print edition. It was adapted from an article that appeared earlier on Computerworld.com.

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