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February 17, 2014 7:21 pm
Autonomy’s sale of Dell servers to Morgan Stanley in early 2010 was typical of the lossmaking hardware deals it said it used to strengthen ties with important customers. But the sequence of events that led up to it highlights the complexity of unscrambling the full picture behind such deals.
December 15, 2009: In an email to Autonomy sales rep Mike Sullivan, a Dell executive laid out two quotes: the $6.28m that Autonomy would pay Dell for the servers, and the $5.712m it would charge Morgan for the same equipment.
December 28 2009: Autonomy sent a proposal to Morgan titled: “Software and Dell server promotion”. The document, seen by the FT, was for a total of $5.788m, of which only $1m was described as hardware. The other $4.788m was billed as “Autonomy software and support as described below”, followed by details of several of the company’s software products.
3pm, December 31 2009: With the clock ticking down to the end of the year, Sushovan Hussain, Autonomy’s president, wrote to Morgan Stanley to try to hurry things along. Commenting on the allocation of the purchase price between hardware and software, he said: “The fact we show value for the software and are selling hardware at a loss in our proposal is a commercial decision for us.”
One person familiar with the proposal denied that it was an attempt to dress up a hardware sale as software. The sizeable discount on the hardware was a reflection of the importance of the customer and the proposal included valid software licences, according to this person.
Mr Hussain failed to close the sale.
6.30pm, December 31 2009: Autonomy entered a separate purchase order recording a software sale to MicroTech, a US reseller, for $4.788m, with Morgan the intended end customer.
According to one of the people familiar with this deal, it was completely unrelated to the other transaction Autonomy had been trying to close with the bank directly.
January 2010: Autonomy pitched a sale to Morgan again involving the Dell servers, this time with more luck. Before signing, a bank representative wrote to a contact at Autonomy: “I would take the word software out of the description.”
But while one person said this was a revival of the deal that had failed to close in December, another described it as a separate proposal that this time only involved hardware, and that the reference to “software” in this instance was to trial software that Autonomy usually included with hardware sales.
The deal was eventually closed – and recorded as a pure hardware transaction. The value: $5.7m.
Early 2010: Complicating matters even further, Autonomy cancelled the sale to Microtech. Morgan had decided it only wanted to buy software directly from Autonomy, according to one person familiar with the events. Another claimed, however, that the sale had been cancelled and replaced by the later hardware-only transaction.
Deloitte flagged the reversed transaction in the “key risks” part of its audit report early in 2010, writing that “there is no significant history of deals being reversed in this way . . . not to be repeated in the future”.
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