Hewlett-Packard and Autonomy dig in for a long war

By Josephine Moulds, The Observer

Little ground will be given in the row between the angry US giant and the bristling, intellectual British entrepreneur, writes Jo Moulds

Until last week, Dr Mike Lynch was being hailed as "Britain's Bill Gates" after selling Autonomy, the software company he started in his garage, for £7bn to US titan Hewlett-Packard. The mathematics whizz had almost single-handedly restored Cambridge's reputation as Britain's answer to Silicon Valley and was feted as one of the rare examples of a scientist turned successful businessman, having pocketed £500m from the 2011 deal.

Now his reputation is under serious threat after HP dropped its bombshell on Tuesday, claiming to have discovered "serious accounting improprieties" at the British firm it acquired for a hefty $11.1bn. The PC firm said Autonomy was worth half what it paid for it and called on the authorities to investigate the company, in the hope of recouping some of its losses.

With his fierce intellect and prickly manner, Lynch has always been a divisive figure in the industry. But he came out fighting, denying the allegations as "utterly wrong"; and some experts think his version of events could be borne out. "I wouldn't bet against Mike Lynch, I really wouldn't," says David Toms, an analyst at Numis who covered the software company for more than a decade. "I think this is going to turn out to be embarrassing for his detractors."

And in the wake of the allegations there has been a parade of analysts saying "I told you so", shifting the spotlight onto HP's management team and the investment banks that advised them to go ahead with the deal. "The noise around accounting irregularities at Autonomy is nothing new," said Richard Windsor, formerly at Nomura Securities. "Autonomy's detractors have been writing about this for years. To any reasonably prudent person, this would have made him doubly cautious when looking into the financial position of Autonomy."

Autonomy was a poster child of both the dotcom boom and bust. From a float price of 34p in 1998, the shares rocketed to almost £34, only to crash to a low of 162p when the bubble burst. As the share price crumbled, Lynch, who is an adviser to David Cameron, started picking fights with analysts who, he claimed, did not understand the technology.

Then came another apparently inexorable rise as investors were wooed once more by Lynch's impressive sales patter about the technology he had created to search the so-called "human-friendly" information locked in emails, voicemail and video footage, rather than the structured databases of the past. "He had a very strong vision and communicated that well, and made customers want that vision," explains Toms. "And it was his vision he was selling; he built the company underneath it."

Still, analysts complained about the aggressive stance he took towards anyone who disagreed with him. As Autonomy's valuation reached eye-watering levels, some started to question the figures. There were claims that Lynch was massaging results; cash flow did not seem to follow the huge profits being announced. And Lynch turned nasty: analysts who spoke out were prevented from asking questions at presentations, while one was banned altogether. As the detractors multiplied, the shares struggled. Then, in August 2011, HP swept in, with its whopping $11.1bn bid.

In an apparent demonstration of the size of Lynch's ego, reports suggested the chief executive believed this was his way of taking over the Silicon Valley giant. A former colleague of Lynch's told the Telegraph: "Mike and the team genuinely thought that they were taking over HP in order to transform the IT industry. The attitude was that we were a Trojan horse within HP."

The jury is out over what happens next. Toms says: "There is certainly temporary satisfaction for the bears. If you were aggressively negative about the stock, HP has come out and agreed with you. That doesn't mean HP is right."

For his part, Toms recommended that investors should sell the stock when the valuation was sky-high, but was a buyer shortly before the sale to HP, as he says the shares had come down to a more realistic level. He describes his relationship with Lynch as "sometimes fractious" but says he never believed the company was committing accounting fraud.

"I didn't think it was as good as the headline numbers suggested and I think they pushed the envelope on a lot of things. But I didn't, and don't, think it was outright fraudulent underneath. I think HP's probably got this one wrong."

Toms says HP's claims are not new. "What they have publicly said doesn't strike me as materially different from what we already knew. I'm surprised they are presenting that as new information. However, I recognise that they may have much more detailed information that hasn't been disclosed and strengthens their case."

Lynch, who lives in a £6m Grade II-listed Georgian manor house in Suffolk, claims he has been used as a "scapegoat" for HP's problems and launched a stinging attack on its chief executive, Meg Whitman, who he says has no idea how to get the best out of the business her predecessor bought.

Whitman – best known for a glittering career at eBay and a hugely expensive failed bid to become governor of California – is in a tight spot. Although her predecessor, Léo Apotheker, pushed the deal through – which some say led to him being fired just five weeks after it was announced – Whitman was already on HP's board at the time, and was one of the 10 directors who signed off on it.

She is now fighting to keep her position, claiming she has already made big changes to right the HP ship. "Mike Lynch and his entire senior management team is gone," she said to investors last week. He was asked to leave HP earlier this year, she explained, after "substantially missing his numbers".

Analysts cite Lynch's vehemence as another reason to question HP. "Usually when someone cries accounting fraud, the alleged perpetrator heads for the hills," says Windsor. "Mike Lynch is standing his ground. I would not be surprised to find out that Autonomy was skating fairly close to the edge in terms of accounting rules, but stopping short of being illegal. It's unusual that the accused have decided to stand and fight."

© Guardian News and Media 2012

[Image via Agence France-Presse]