HP and Autonomy: a parable on due diligence
February 8, 2014 Leave a comment
February 7, 2014 8:14 am
HP and Autonomy: a parable on due diligence
By Neil Collins
“Autonomy’s technology allows computers to harness the full richness of human information, forming a conceptual and contextual understanding of any piece ofelectronic data”. Thus read a footnote to one of the company’s constant light drizzle of petty announcements in 2011 when it was a listed company, this one for an order from an un-named US bank worth $50m “over the next few years.”
There were those who claimed to understand exactly what Autonomy did when it wasn’t gobbling up other mysterious companies, while others gave up the unequal struggle and produced research questioning the whole enterprise. The bulls propelled the company into the FTSE 100, and to an $11bn takeover by Hewlett-Packard, the maker of computer hardware and overpriced printing inks, that was looking for something more exciting.
The acrimony broke out almost as soon as the deal closed, poleaxing the HP stock price, and the two sides have been exchanging fire ever since. HP has been muttering darkly about fake sales, and this week published restated 2010 accounts for Autonomy showing half the previously declared revenues, and 81 per cent less profit.
That’s quite some restatement. A member of Autonomy’s former management blames HP for not nurturing the delicate flower of its technology, and then talks of differing accounting treatments. Neither explanation begins to bridge such a gap, although the new numbers do produce the handy side-effect of cutting HP’s UK tax bill.
Autonomy’s auditors Deloitte are sticking to their guns, but HP’s auditors, Ernst & Young, won’t give an opinion on the restated numbers, citing lack of “appropriate evidence”. This is curious indeed, since we’re told that nothing electronic is ever destroyed nowadays, so it may owe something to the reluctance of one big four accounting firm to attack another.
There’s so much money at stake here that court action seems inevitable. While erudite arguments over sales recognition may not grab the headlines, an independent analysis of Autonomy’s accounting methods is urgently needed.
Outside the profession, audited accounts are still seen as something to rely on, even if the signatories no longer claim that they present a true and fair view. In this case the process seems so inexact that it’s hardly a science at all. Accounting bodies, please note.
Then there’s the little matter of due diligence from HP and its advisers. There was plenty of work from analysts doubting Autonomy’s ability to “harness the full richness of human information” before the bid. Studying it might have saved billions for HP shareholders, who might now look to those advisers to get some of it back.
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