HP Autonomy: Tax Methods and a Sidewalk Guarantee
December 3, 2014
I watched Dr. Mike Lynch on CNBC explain, quite patiently, that Hewlett Packard struggles with accounting procedures. He pointed out that HP created a document that explains how a rebasing exercise created the magical billions written off the $11 billion purchase price of Autonomy.
The story gets some legs in “Document Raises Questions on HP’s $8.8bn Write Down of Autonomy.” Note that this a Financial Times’s document and you may have to pay to view it, assuming it is still online when you read this blog post. The link I am providing plunked me in the middle of a wonky “slide show” with the article stuck on the lower edge of the PowerPoint.
The write up reports that Mike Lynch was fired and a team of HP professionals started work on a rebasing exercise. My thought is that if one is going to spend $11 billion, one might want to do one’s homework BEFORE turning over the cash and buying the company.
Dr. Lynch is quoted by the FT as saying:
“The document was completed a month after HP made those allegations and any future valuation of the company would have had to include them. HP’s own court filings repeatedly assert the rebasing analysis includes the effects of the allegations,” he said.
In terms of time, HP purchased Autonomy in October 2011. Autonomy had discussed selling with other companies. Autonomy tapped the expertise of Frank Quattrone and his colleagues at Qatalyst Partners. Oracle posted some information about the Quattrone pitch deck in September 2011. You may be able to snag a copy at http://www.oracle.com/us/corporate/features/please-buy-autonomy-503330.html.
Autonomy is unique among vendors of enterprise search systems. It was the first company to generate revenues from enterprise search in excess of $600 million. At one time there were more than 60 vendors competing directly with Autonomy. Some like Convera and Siderean Software ran into financial difficulty. Others like Fulcrum Technologies, iPhrase, Exalead, ISYS Search Software, and Vivisimo among others were able to find buyers before the market contracted more. Most vendors of enterprise search either scrambled to reposition themselves or develop technologies that positioned the companies to provide something other than search which was by 2008 accelerating on a path to becoming a low value utility.
HP, as I recall, performed due diligence. After doing the MBA and CPA thing, the company paid $11 billion for a company that after 15 years of invention, innovation, great marketing, and savvy acquisitions was at full sail. At the time of the deal, proprietary search was under assault from open source options that were simply “good enough.” HP bought at a time when valuations of search companies was not just softening, valuations were downright mushy.
HP, I assume, is smarter and more informed than I. HP bought Autonomy, and HP quickly demonstrated its buyer’s remorse. The groaning and moaning about Autonomy not being worth $11 billion is becoming a bit tiresome.
I envy Dr. Lynch for his ability to maintain his poise and temper. I am not sure I would have advised HP to purchase Autonomy. I know what happened to AltaVista, which HP converted into jet fuel for Google. I know that the company has been plagued by management upheavals and products that seem to have wandered from the HP way. Ink is profitable, but it is not a refined scientific instrument. Now HP’s senior manager is garnering some attention due to Pando.com’s write up “Documents Show How eBay’s Meg Whitman and Pierre Omidyar Conspired to Steal Craigslist’s Secrets.” If true, I wonder how reliable HP is today when it comes to presenting facts in a fair and accurate manner.
Exalead commanded a sale price of about $200 million. Oracle paid about $1 billion for Endeca. Microsoft paid $1.2 billion for Fast Search & Transfer. Vivisimo went for a modest $20 million. Now along comes HP dragging the history of its mishandling of AltaVista.com and ponies up $11 billion. I found that number pretty darned amazing, and I have done work with some pretty crazy investment bankers over the years. HP paid the equivalent of the purchase price of nine Fast Search & Transfers, a company that landed in hot water for its financial methods. HP paid the equivalent of buying more than 50 Vivisimos. Consider $20 million or $1.2 billion versus $11 billion. Yowza. What the heck were the consultants advising HP using as a valuation scorecard?
My view is that HP wants its money back. I remember when I bought a 1955 Oldsmobile from a used car dealer on the bad side of Peoria, Illinois. I asked, “Does the car come with a warranty?”
The dealer looked at me and said, “See that sidewalk? When you drive the car off the lot and hit the sidewalk, you get a sidewalk guarantee.”
I had no idea what a sidewalk guarantee was. I asked, “What’s a sidewalk guarantee?”
The dealer replied, “When you cross that sidewalk, you are responsible for any problems with the car.”
HP is now struggling to understand “sidewalk guarantee.”
Stephen E Arnold, December 3, 2014
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