Here's what Lynch, Hussain and HPE are saying about Autonomy pre-buyout due diligence With the Autonomy trial well and truly under way, what is each side saying about auditors' reports and due diligence? The Register has been through the legal papers to distil it down. The state of Autonomy's auditing and pre-buyout due diligence forms an important part of HPE's pleaded case against ex-Autonomy chief exec Mike …
... admitted he hadn't read Autonomy's quarterly accounts for the two periods in 2011 immediately before HP acquired the company – and neither did he read KPMG's draft due diligence report, no final report having been submitted.
Well ...
This seems to clear it all up rather nicely, no?
Buying an expensive used car?
You check out all the relevant papers, talk to the present insurance agent and have your trusted repair/body shop have a good look at it.
Bought it on a whim, in a rush without doing all that?
Then you're a certified idiot.
And if you're using your old lady's money to buy it, you are also in very deep shit.
Be sure that if this deal would have depended on a line of credit or leverage from a bank consortium, it would not have gone through.
O.
The reports make an interesting read. I have been involved in one or two very small scale DDs and agree that the results are often overlooked in support of a choice already make. In this case was one end thinking they were buying a car and the end thinking they were selling a camel? Both are a means of transport, though in one case you might make a small margin on the milk and the produce for field fertiliser. That is not so likely with a car
For something that's going to consume 11 billion dollars in cash (not some kind of share swap) shall we say that the CEO interest (given "It's the future of the company") seems a tad minimal?
I'd say "I bet he regrets that now," but honestly I don't think he does.
After all it wasn't his money he p**sed away.
And maybe that's the problem.
CEO who don't feel any sense that it is their money.
"The directors of such joint-stock companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private company frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company."
- Adam Smith, Wealth of Nations, 1776
" Lynch and Hussain also accuse HP of not having understood that Autonomy's accounting system was subtly different from the American megalith's practices"
HP has plenty of experience in reseller networks across the world, including the UK, and therefore an appreciation of the accounting methods available. This is either a daft argument by Lynch and Hussein and they will be exposed for it, or, HP really dropped the ball here because they have the internal experience to know how this stuff works.
I think it's the same with 'appliances'. HP should have known that an appliance is a hardware and software bundle, and looked at the numbers for both. Same with reselling 3rd party software as part of any solution sale, ie OS licences, databases, utilities etc that aren't Autonomy's own IP. Again all entirely normal.
"they have the internal experience to know how this stuff works."
Starting with their CFO. Given the way her opinion was treated would anyone else have stepped up to get a dose of the same?
It seems like the old story - give the benefit of your wisdom on a decision that's been made and you're being negative.
"It's very unusual to get as far as DD and not complete the transaction."
As far as my experience goes, not extensive, due diligence is used more as an arse covering exercise that actually finding out what's under all the promotional gloss.
Caveat emptor is still a valid expression and from what I can gather here HP really wanted Autonomy, much like a two year old wants that new toy they have just seen.
from what I can gather here HP really wanted Autonomy
I think it's more that Apotheker and Robison really wanted Autonomy, and they convinced a weak board of directors to go along with them. Most other people at HP seemed either ignorant of or leery about the deal.
Not that I think Lynch et al. are innocent; they promoted a wildly excessive valuation for Autonomy, and while I'm in no position to judge Hussain (not having access to all the evidence, nor made a close review off it), I'm not going to ignore his conviction either. But Apotheker, and perhaps Robison, seem to have forced through a deal that was widely and correctly perceived as very bad for HP.
And, frankly, in my opinion the directors of HP should share a healthy portion of the blame, particularly since HP's board (unusually) had a "technical committee" which was supposed to review all M&A before it went before the whole board. There's some suspicion that the board appointed Whitman - who was on the board during Apotheker's term - as the new CEO partly so she could work to deflect blame away from them.
... the key thing when buying a SaaS business and conducting DD, is to look at the *quality* of the revenue, the recurring nature, the amounts which are not recurring. I think this seems to be (but obviously I have not read the mountains of legalese) a case of insufficiently thorough DD... the seller in a deal is expected to be 'coy'... the buyer therefore hires massive teams of expensive accountants and lawyers to look into this. Looks to me like HP were keen to announce to a fixed deadline, so took some expensive shortcuts. Caveat emptor and all that.
"the key thing when buying a SaaS business and conducting DD, is to look at the *quality* of the revenue"
There seems to be a lot of emphasis put on Autonomy being a pure play software house and not engaging in hardware sales.
Was HP perhaps expecting to move from pure play software into bundled hardware/software and managed solution sales with it's fine range of servers and storage as one of its synergies? Surely you would have someone look for that if it was your cunning plan?
In which case, there seems to be a disconnect between asking senior Autonomy management and checking the numbers to see what the revenue consisted of IF the "fraud" is as large as HP says.
Which leads into the second question - was the level of "fraud" material to the acquisition? It seems to have been small enough to escape notice by HP/Deloitte/KPMG but large enough to justify a significant write down. And you have a due diligence report that was never finalised, so it hasn't been signed off.
HP argued that it "never crossed the minds" of KPMG's due dil team "that Autonomy was making substantial sales of third party hardware on a standalone basis (i.e. pure hardware sales)".
It never crossed their minds?!? Now that's a lame excuse.
KPMG were doing due diligence it's their job to look under every stone and even it that dusty cupboard buried behind all the broken furniture.
Very.
Auditors (should) think sneaky, duplicitous, incompetent and downright criminal from the moment they set foot inside a companies office.
But if they are acting as professional con-sultants...
The answer is always yes, now what's the question?
KPMG and HP's in-house due diligence teams didn't flag up anything about hardware sales, they must have been misled.
Well d'Oh! Isn't that why you employ professional auditors, to look at the facts and work out if you're being misled? By admitting they were misled, aren't KPMG just admitting that they're incompetent?
"aren't KPMG just admitting that they're incompetent?"
According to other reports, KPMG reportedly advised HP's board that they needed more time to complete due diligence after 2-3 days. i.e. "didn't flag up anything" could mean "hasn't had a chance to look at this yet because of time constraints".
And given that HPE are chasing Autonomy and not KPMG or Deloitte, it appears that the auditors are in the clear. Maybe not innocent, but in the clear...
"And given that HPE are chasing Autonomy and not KPMG or Deloitte, it appears that the auditors are in the clear. Maybe not innocent, but in the clear..."
Or they realise that the Auditors clearly covered their arse and acted on client instructions to the letter, including time constraints.
re "didn't flag up anything"
Unbelievable.
Top four globalised auditing group : "This here Autonomy business, from it's published accounts, and capitalisation is worth around $500m to $900m**. And you're paying how much?"
Buyer : Oh, just the small matter of $11b.
If that doesn't flag up anything then all is lost.
** purely made up by myself, have no knowledge of any actual figures. For illustrative purposes only.
"** purely made up by myself, have no knowledge of any actual figures. For illustrative purposes only."
Based on 2010 figures:
Assets (excluding goodwill): US$1.9bn
Goodwill: US$1.3bn
Liabilities: US$1.2bn
Annual revenue: US$870m
Annual profit: US$376m
So assets + 10 x profit gives around US$6bn. Add another US$1bn for growth in 2011 and you are in in the ball park of their market cap, although analysts believed they were over valued. Obviously not the analysts that HP used...
This.
What I heard at the time was this:
Autonomy: We are for sale for $6billion
HP: We'll give you $11billion
Autonomy: Errrrrrr. OK! :D
If you put your car up for sale for £600 and someone tries to buy it, but for £1100 and forces the cash in to your hand, are you really liable for overcharging them?
Autonomy didn't think they were worth that.
HP finance people didn't think they were.
But Leo and his adviser decided $11bill was a snip as they could make it worth $17bill!
In reality they made it worth about $3.5 bill.
Autonomy should point out prior behaviour to the court too.
They are far, far, far, from the only company HP have bought and messed up.
"By admitting they were misled, aren't KPMG just admitting that they're incompetent?"
I think the word is "alleging". That puts the blame elsewhere. I expect the Autonomy PoV will be along the lines of they weren't misled at all, they didn't look. Or maybe the sale went through without the final report which would have had it in. HP seem to have let everyone off the hook by not waiting for that.
The whole chain of "Ich habe es nicht gewußt" arguments from HP's side got problematic from the moment there was evidence that HP's CFO (whose actual job it is to have a look at stuff that involves $$$) strongly, even aggressively advised against the deal.
I'm not sure she did this on the basis of a deeper insight or simply because there was in general a serious mismatch between the value of Autonomy and what HP was going to spend, but the evidence that her objections were overruled is not going to help HP here.
Personally I think that Leo's balls are on the line here - for whatever reason, he made the wrong call. That he then later discovered he had even less than thought is what made it worse, but he's now attempting to use that to make it appear that that was the whole reason for the write off.
I would be surprised if that one will fly, Lynch isn't stupid either.
and now want blood.
There were failings all around. In
HP... Not reading the company reports.
HP's Auditors ... WTF were they doing especially not issuing a final report
HP ... for trying to do a deal by a date they imposed
Autonomy... for being a shit company that was all smoke and mirrors
The US courts will side with HP because that's what they do. MAGA and all that.
This will run and run though.
Paris because like Brexit, this has already gone on far too long.
Any large software house will sell some hardware and third party software licenses when necessary to close a deal. There are parallels with other businesses were a company will sell additional stuff to sweeten the deal for the customer. The customer gets one-stop-shopping with one vendor to yell at if something does not work and the vendor gets a large contract with more control over the subsystems. Do right this is a win-win for both. So it does not surprise me that Autonomy was selling hardware and third party licenses and I also would not surprise if HP would do the same including third party hardware. So Leo is not the village idiot or national idiot but the planetary idiot for not having a clue or being willfully arrogant believing he next in line to God.
Really, the printer jokes write themselves. "KPMG did finish the final report, but Leo's printer ran out of ink so he couldn't finish printing it." "HP actually paid only $1B for Autonomy, but refilling the software was another $10B."
(I know they're separate companies - HP Inc and HPE - now, but the Autonomy deal was pre-split, of course.)
Another factor might be that Leo Apotheker-- a software guy brought in specifically to transition HP to a pure "services" outfit and looking to reduce HP's dependence on hardware sales-- simply saw what he wanted to see in Autonomy's figures and disregarded how much of their money was coming from hardware sales. None so blind etc.
Don't shed any tears for poor Leo Apotheker . Like his predecessor, former CEO Mark Turd, he was handsomely rewarded with a fabulous severance package when he was fired. HP had been one disaster after another since the days when Carly Fiorina became CEO. Each subsequent CEO had also failed the shareholders and employees while walking away with millions after being fired. This is the sad state of affairs in US corporations these days. There is no downside for a CEO to fail.
Yup, I've said it before, with CEOs it's always, "the buck stops with me, that's why I'm paid lots!" and then "waaah! I didn't know anything how can a mere mortal like me be expected to know everything that goes on around here?" when the buck actually does stop with them. But they at least can comfort themselves in the soft billowy folds of their golden parachutes... always.
'HP argued that it "never crossed the minds" of KPMG's due dil team "that Autonomy was making substantial sales of third party hardware on a standalone basis (i.e. pure hardware sales)'
HPs lack of knowledge of Autonomy's business cannot be blamed on anyone but themeselves and some of the things they claim not to have known defy believe.
"is clear in his evidence that he knew about Autonomy's appliance sales, but that at no point did anyone from Autonomy tell him that Autonomy was reselling third party software as part of its business".
How could Autonomy avoid reselling 3rd party software such as OS licenses? How could anyone imagine that they didn't?
The impression so far is of a reckless and cavalier HP buting Autonomy without no understanding, analysis or even interest in the details of the business. Yes they paid wildly over the odds but why should the seller be responsible for the buyers gross incompetence and recklessness?
As HP's case implodes what does this say about Hussain's conviction and the ability of the US legal system to fairly handle disputes between US companies and foreign companies?
"As HP's case implodes what does this say about Hussain's conviction and the ability of the US legal system to fairly handle disputes between US companies and foreign companies?"
Nothing new?
US corporate justice has been a case of either having the money to buy your verdict/defence or taking the cheapest escape route.
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