Mike Lynch rejects HP’s claims – accuses tech giant of mismanaging Autonomy

21 Nov 2012

Dr Mike Lynch sold his company Autonomy to HP for more than US$10bn

Dr Mike Lynch, who sold his company Autonomy to HP last year for more than US$10bn, has rejected allegations levelled by HP. He said the mark-up on Autonomy’s software was increased by 30pc, driving away long-term customers, and said how HP could miss US$8.8bn “beggars belief” and is a “distraction” from wider issues within HP.

Yesterday, HP in reporting its Q4 and full-year 2012 results, said it had to make a write-down of US$8.8bn related to its acquisition of Autonomy and that it had notified the Securities and Exchange Commission and the UK police.

According to various reports, the FBI are now on the case.

In a report on All Things Digital, where Lynch, a native of Carrick-on-Suir in Ireland, spoke to veteran tech writer Arik Hesseldahl, Lynch rejected HP’s accusations and said he hadn’t been contacted in any official capacity by HP.

Lynch accused HP of mismanaging Autonomy, pointing out that as soon as it was under HP’s ownership HP managers added a 30pc mark-up on Autonomy software, which  in effect drove away long-term customers. In other cases, HP salespeople were paid commissions to sell third-party products that competed with Autonomy’s software but were paid no commission for selling Autonomy’s software.

According to the All Things Digital report, Lynch said: “Basically, we reject completely the assertion of HP. It’s completely wrong. The reality of the situation is that when HP bought Autonomy it had hundreds of people involved in due diligence, which was described at the time as ‘meticulous.’ And KPMG, Barclays and Perello were all involved there. And they’ve actually run it for a year. To somehow admit a $9bn elephant in the room just beggars belief, frankly.”

Hard time

In the interview, Lynch said Cambridge UK-based Autonomy came into the HP fold at a time of considerable in-fighting at HP and with the dismissal of Leo Apothekar and Shane Robison, other divisions and factions had become stronger within HP.

This resulted in a “hard time” for Autonomy and with many of its senior management team and staff departed, the asset was largely undefended.

“I think the reality is that the business has not been managed in the last year. It’s not inconceivable that the business has gone down in value. The question here is about the amount. I suspect that every spare cent has been thrown into this write-down,” Lynch accused.

In an analysis on Bloomberg, business writer Jonathan Weil said the numbers put forward by HP didn’t make sense.

“Goodwill is the bookkeeping entry that a company records when it pays a premium to buy another company. More precisely, it’s the difference between the purchase price and the fair market value of the acquired company’s net assets. Goodwill can’t be sold by itself. The goodwill in this instance tells you that HP paid $6.9bn more than it believed Autonomy’s net assets were worth,” Weil wrote.

“Now HP is writing down some of that goodwill and blaming it on supposed financial-reporting improprieties by Autonomy. This also doesn’t make sense. HP didn’t record the goodwill because it was lied to by Autonomy. HP recorded the goodwill because it knew Autonomy’s identifiable assets were worth much less than it paid.”

What may follow in the months and years ahead could be one of the most divisive and insightful court battles in tech industry history.

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years