November 20, 2012 7:00 pm
Few big takeovers in recent years have received quite as harsh a reception as that accorded Hewlett-Packard’s $11bn bid for the British software developer, Autonomy. Not only did the US technology group’s shares crash on announcement; angry investors later forced out the chief executive responsible, Léo Apotheker.
Now, just over a year later, it is clear how right the market was to be worried. HP has written down nearly $9bn – or 80 per cent of the purchase price. It alleges that a big chunk of these impairments are the result of Autonomy’s “accounting irregularities, misrepresentations and disclosure failures”. While HP still believes in Autonomy’s technology, the company’s margins – long a source of wonder in the software industry – are lower than it thought.
The responsibility for the failings identified in HP’s somewhat belated independent due-diligence review (itself triggered by an internal whistleblower) has yet to be established. Autonomy’s former boss, Mike Lynch, has denied any wrongdoing. But the sheer size of the gap in value makes it hard to credit this purely to Mr Apotheker’s credulity – or HP’s subsequent mismanagement.
The allegations are serious. If true, they point to failings of process and governance. Accounting in software businesses is a notoriously slippery area. But the idea of mischaracterising more than 10 per cent of revenues – as high-margin software sales when they came from low-margin hardware – is hard to pass off as some oversight or bad judgment call.
The US group has referred the allegations to the Securities and Exchange Commission and to the Serious Fraud Office in the UK. It is also seeking compensation. The investigations should uncover whether blame can be attached to Mr Lynch and his colleagues. They might also usefully look at the role played by Deloitte, Autonomy’s auditors. If the allegations are correct, they stand accused of slumbering at the spreadsheet.
The majority of mergers and acquisitions fail to add value. Valuing software companies is an art, not a science, and buying growth is a chancy business. HP may have been reckless but at least Mr Apotheker – if not his fellow directors – has paid the price.
More worrying is the fact that Autonomy was not a start-up but a longstanding member of the FTSE 100 index. The sort of scrutiny it faced ought to have precluded the irregularities of which it is now accused. If these checks failed, that is the real scandal.
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