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HP Autonomy: Thoughts about Big Deals for Search Vendors

I just finished my Information Today column for next month (January 2013). I thought briefly about about focusing on the Hewlett Packard Autonomy matter which is a tad too much in the news at the moment.

Caveat emptor. Hasn’t anyone heard this reminder? The deal is over. Type A MBAs, whiz kid lawyers, and blue chip consultants crawled all over this deal. The HP board approved the deal which was roughly 10X more than Microsoft paid for the exciting Fast Search & Transfer technology thrill ride.

I choose not to tackle HP and Autonomy directly. What I decided to do was work through some of the business cases I have encountered over the year which make murky financial water the status quo. The players in these examples which I characterize at a high level and as a non accountant are like the predators in the Amazon River. I wanted to point out that some of the deals related to search, content processing, and analytics can be models of complexity theory for math experts at the Santa Fe Institute to ponder. Normal lawyers and accountants and the run of the mill MBA are out of their depth in my experience when thinking about a search plus services tie up.

As I was finishing the article, my alert service beeped. The occasion was the arrival of articles about letters from Autonomy placed in “open source” and an equally public response from Hewlett Packard. You can find more information in the “Former Autonomy CEO Challenges HP” article in MarketWatch or you can wade through the lists of stories posted on Techmeme.

I don’t have a dog in this fight. I have several observations I want to capture before the slip away from me as I get ready to head to South America.

The 1957 Studebaker Golden Hawk I almost bought in 1963 came with a sidewalk guarantee. Search and  content processing systems are warranted in a similar manner by their sellers. The Wikipedia explanation of caveat emptor makes the meaning of this Latin catchphrase clear: Under the principle of caveat emptor, the buyer could not recover from the seller for defects on the property that rendered the property unfit for ordinary purposes. The only exception was if the seller actively concealed latent defects or otherwise made material misrepresentations amounting to fraud. See Wikipedia

First, the gap between some investors’ expectations for revenue from search and content processing greatly exceed reality. I have been around the information retrieval business for a week or two. In that time, I have encountered people who believe that their findability or indexing system will generate Google sized dollars. I tell these folks that Google generates Google sized dollars from ads, not its search technology. Only a handful of companies have been able to generate more than $100 million from search. These companies are the anomalies, not the rule. My hunch is that like the “smart money” that blew $50 million on one promising system, dreams can be expensive. As you may know, the folks who support the high expectations catch “spreadsheet fever”. The result is that when the money is finally sorted out, search is an expensive proposition. There’s a reason why IBM embraces open source search. May I suggest you read my IDC reports on this open source search subject.

Second, the crazy valuations are like the promises of teenagers in love. The parents, if they know, view such tie ups with skepticism. Just try and tell that to the two teens who have the force which through the green fuse drives the flower. In the grip of this “force”, history and hard facts play a modest role to play. What takes over is mutually reinforcing inputs from the youthful lovers on a hormone high. Deal lust works in the teen way. Is this why so many gray heads get into doing bigger and bigger deals under more and more false time constraints. Pant. Pant. Pant. I can hear the breathing now. Those contracts have to be signed, the commissions most definitely earned, and the money transferred pronto. Is it any surprise why so many acquisitions go off the rails? The parties to big deals include the buyer, the seller, the lawyers, the accountants, the partners, and the consultants. If that line up of professionals does not make clear how Voltaire’s bastards operate, read John Ralston Saul’s book on the subject.

Third, marketing hype puts the believers on what I call a Twinkie high. In my experience, there are a few people who really understand the way to turn a profit in the search and content processing market. At any one time, only one or two of these people are available to work on a particular deal. The reason has to do with availability, non compete agreements, employment restrictions, personality, vacations, and health. These individuals know what the costs, the likely revenues, and the contractual complexities are. But in the midst of dozens, if not hundreds of people who have zero clue about search, the informed voice is either drowned out, not understood, or ignored. The legions of the clueless believe that they know better. Right. That assumption may warrant further investigation.

Is there a book like this for acquiring search and content processing companies? A happy quack to http://theblacksheeponline.com/article/hooking-up-the-right-way

Why would Microsoft pay $1.2 billion for an outfit which would fall under the umbrella of Norwegian financial authorities? Why would Oracle pay billions to snap up companies with somewhat similar technologies when those companies were struggling for organic revenue and would impose significant demands for Oracle investments to the acquired technology up to snuff? Why would Lexmark buy two search companies (one based on trigrams and one based on 1988 technology) and assume that Lexmark management can pivot the printer business into a financial home run? The reason is that the clueless actually believed the vendors’ marketing baloney. Search and content marketing is closer to the writing in Match.com than concrete data about the search business.

Let’s step back. How much money is Google generating from its decade old Google Search Appliance? Google won’t say. The reason? Google after 13 years is dependent on ad revenue. The enterprise search products and services are laggards in my view. There is anecdotal evidence that Google has licensed upwards of 65,000 GSAs to organizations worldwide. But how much dough flows to Google from enterprise search? Maybe $200 million, maybe $600 million? Peanuts compared to ad revenue. An analyst can easily make some assumptions and fold in other revenue and make that $600 million look good. But in my work I know first hand that in most organizations in which I work, employees at all levels tell me, “I want a search system just like Google’s.” Think about it. If Google can’t make tens of billions from search and professionals want the Google system, how in the heck can companies without Google’s grip on the market achieve a crazy goal like paying off the purchase price of Autonomy? Wow.

Let me wrap up by telling you a story from 1963. I did some work indexing Latin sermons. I got some money. I wanted to buy a Studebaker Golden Hawk from a guy who parked the flashy car in his yard. I saw it every day with its For Sale sign when I walked to the rat hole near campus which housed the university computer center. I asked the Studebaker seller what kind of guarantee the car had. I will never forget what he told me. He said, “This Studebaker comes with a sidewalk guarantee.”

I asked, “What’s sidewalk guarantee?”

He said, “When you take that Golden Hawk across the side walk, it is your problem.”

I did not buy the car. Recently Dassault Systèmes, Hewlett Packard, IBM, Lexmark, Oracle, and Microsoft bought Studebaker Golden Hawks.

The management wizards now have to deal with the consequences of their purchases. Good luck with that. I am available to explain the realities of search, content processing, and analytics systems to potential investors. But the last crowd I spoke with told me, “We know how to do search and make it pay.”

Sure. Sure.

Stephen E Arnold, November 28, 2012

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