HP-Autonomy and the KPMG Due Diligence Document

June 15, 2019

I noted this article in The Register, a UK online publication: “HP CFO Cathie Lesjak Didn’t Even Read KPMG’s Autonomy Due Diligence Before $11bn Biz Gobble.” The write up reports that Hewlett Packard professionals did not read a report about Autonomy prepared by the accounting and consulting services firm KPMG. DarkCyber finds the information in the article interesting. We noted this statement in the Register’s write up:

Barrister Robert Miles QC asked her: “I think you didn’t, yourself, read a due diligence report prepared by KPMG, is that right?” Lesjak replied: “I did not.”

As intriguing as this exchange between Autonomy’s attorney and an HP executive involved in the astounding $11 billion purchase, the Register provides a link to the “confidential” and “draft” report about the finances of Autonomy.

Image result for buyer beware

The document is available at this link. Note: that confidential documents can be removed from public access at any time. DarkCyber, an organization with more time but fewer resources than HP, read the document online.

DarkCyber’s conclusion is that HP’s failure to read the KPMG draft deprived the HP executives of information germane to the purchase price of $11 billion.

Other items of interest to DarkCyber in the KPMG document dated August 9, 2011, were:

  • KPMG itself lacked access to certain information; for example, certain details related to Autonomy’s income taxes
  • Autonomy’s financials (top line revenue and profits) were softening after the $870 million in revenue reported in FY2010
  • Autonomy used a method known as “Tower” in order to achieve certain financial objectives; namely, obtain maximum financial benefits from its activities such as loans.

The KPMG report is a “draft” and its authors presented sufficient information (even though that information is incomplete) to call into question the purchase of Autonomy for $11 billion.

The deal did not work out for either HP or Autonomy. HP lost traction with its shareholders. Autonomy found itself mired in an unpleasant and highly visible legal battle.

DarkCyber’s view is that companies engaged in search, retrieval, content processing, and allied disciplines have an unusual track record. For example, a number of little known companies simply failed to meet their revenue objectives and went out of business. Examples include Delphes (Canada), Entopia (Israel), InQuire, and others.

Other firms engaged in Autonomy-type software and services sought buyers in order to avoid financial problems. Examples include Exalead (acquired by Dassault), Vivisimo (acquired by IBM), and others.

Convera and Fast Search & Transfer are examples of enterprise search and Autonomy-type services caught in the same business quagmire as Autonomy; that is, robust promises about technology, difficulties generating sustainable revenue, problems in satisfying customers, and problems controlling infrastructure, R&D, and customer support costs. Convera (once Excalibur) was rescued by Allen & Company but was unable to deliver satisfactory solutions to information processing needs at Intel and the NBA. Fast Search & Transfer was involved in a financial investigation related to the company’s balance sheets. Microsoft stepped in and bought Fast Search in 2008.

Most of these problems with Autonomy-type companies stemmed from a combination of these miscalculations, errors in judgment, or over optimistic marketing:

  1. Search and retrieval is difficult to define; therefore, whatever system is installed at an organization will disappoint most of a system’s users. For this reason, large companies have a specialized system for legal, one for bench chemists, one for marketing, etc. Due to disenchantment, competitors can make a sale only to face clamors for engineering fixes or termination of the contract. Sustainable revenues are, therefore, a characteristic of Autonomy-type companies. (The KPMG report makes clear that Autonomy relied on acquisitions to increase its top line revenue.)
  2. Enterprise search vendors typically over promise and under deliver. Sales professionals and marketers glibly explain the value of unlocking the hidden value of an organization’s data. The reality is that the costs of determining what data are available, who can view certain data, cleansing and validating that data, indexing the data, and then keeping the indexes up to date and in line with access privileges is a significant burden. The cost of “unlocking’ exceed the available resources and appetite for investment in many licensees of Autonomy-type search systems. (The KPMG rolls these costs into undifferentiated line items, a serious omission. These costs help explain the “you can’t get there from here” problem inherent in Autonomy-type software.)
  3. Autonomy-type systems from the period covered in the KPMG report were mostly proprietary code. Over time, these code bases became increasingly complex and at the same time more fragile. As a result, the costs of standing up a system, fine tuning it, and then tailoring it to the needs of the licensee grew over time. Like the content preparation work in item 2, the ongoing costs of the Autonomy-type system added another set of hard to control costs. (The KPMG report does not provide detail related to the costs of triage engineering to fix urgent problems, on-going fixes, and work needed to keep the foundation system current with competitors’ innovations.)

There are other issues with the KPMG which DarkCyber noticed.

Net net: KPMG did a good job making clear that the deal was likely to be a difficult one due to the tax methods, the intra company financial processes, and the mechanisms used to allow Autonomy to demonstrate growth and reasonable margins over the period of time covered by the KPMG professionals.

HP seemed oblivious to the issues “enterprise search” posed; specifically, enterprise search is a niche business delivering expensive, proprietary solutions which rarely satisfy its users regardless of the vendor involved.

HP wanted to buy and buy big and fast. Autonomy appeared to be the solution to HP’s problems. KPMG identified the issues. Impulse buy? Maybe. Uninformed buy? Looks like it. Did Autonomy buff its show car software? Of course, getting the customer to buy is the objective.

Profiles of selected Autonomy-type software vendors are available without charge at the Xenky.com Vendors Web page. You can find that collection of vendor profiles at this link.

Stephen E Arnold, June 15, 2019

Comments

One Response to “HP-Autonomy and the KPMG Due Diligence Document”

  1. Steven Knowles on June 17th, 2019 4:11 am

    A good analysis and it will be interesting to see how this plays out as a factor in the rest of the trial. Why pay all that money to KPMG and ignore the flags raised for further investigation?

    Also, KPMG’s silence is deafening, but understandable!

    One point: I believe that the report was an interim report rather than a draft one (as was pointed out to me in a response to one of my comments on the original article)

    Steve

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