Thursday, March 20, 2014

Balancing Autonomy and Responsibility

Yesterday's public letter from Mike Lynch, Autonomy founder sparked a lot of conversation around foul play, transparency, and responsibility to shareholders, simultaneously igniting the aging topic of whether Autonomy was a smart buy (however unsuccessful it has been for HP).

Lynch claims that HP's senior executives were aware of all aspects of Autonomy prior to acquisition, and has launched a smear campaign against Lynch and Autonomy in order to cover up their failure to perform their due diligence.

The questions asked of Meg Whitman and the Board are bullet pointed below:

On the basis of recent reports, there are a number of material questions HP needs to answer:

  • HP has repeatedly declined to show the Autonomy management team the allegations or evidence against them, on the grounds that the issue is “with the regulators”. Yet it has engaged in selective disclosure of these documents and emails to the media. How does HP justify that?
  • HP claimed Autonomy’s auditors had “missed” certain items and been misled. All the evidence in the public domain shows Autonomy was fully open and transparent with its auditors (Financial Times, 17th February 2014). If HP has any alternative evidence, why does it not reveal it?
  • HP claims to have been in the dark until a “whistleblower” stepped forward. Articles in the Financial Times have established that the most senior managers of HP fully understood Autonomy’s accounting methods from when they took over the company in October 2011. Does HP deny that senior managers had prior knowledge?
  • Does HP deny that it knew how Autonomy recognised hardware sales and that these sales were reported in full by its auditors, and that HP continued the same sales of Dell hardware after it took over Autonomy?
  • Does HP deny that it was aware of how Autonomy recognised reseller transactions? And that it sought to use the differences between IFRS and US GAAP applicable to reseller sales to its own advantage after the acquisition?
  • HP’s independent advisers carried out several valuation reports of Autonomy after the acquisition, which explicitly included Autonomy’s hardware sales and confirmed the value of the company at c$11Bn? Does HP management deny this? Will they disclose these reports to shareholders?
  • Why did HP’s management fail to disclose these valuations at the time? Why do they not release them now?
  • Why won’t HP release its calculation for the write down?
  • HP says it “eventually learned that a portion of Autonomy’s revenue were related to hardware sales”. Yet documents show that HP knew about Autonomy’s hardware sales from October 2011. Does HP still maintain it knew nothing before June 2012?

Lynch brings up some excellent points, which undoubtedly will be hastily brushed under the carpet by Whitman and her PR machine, loudly distracting people with their "Five Year Turnaround" plan rhetoric.

As I have stated before, this comes down to a few possibilities, none of which are a positive sign of leadership for HP and the future of the company.

1. Autonomy was not fully vetted the way that it should have been before leading shareholders to believe that it was a solid buy for HP.
2. Autonomy was vetted but the Board and CEO at the time decided it was a favorable buy, despite its alleged shortcomings, and failed to disclose aforementioned shortcomings.
3. Autonomy was properly vetted and things looked good, but leadership failed to properly grow Autonomy into HP's offerings in a way that was economically viable.

Meg Whitman - Always Pointing Fingers
This was no small mistake.

Still, in typical Meg Whitman fashion, this acquisition's failure is solely Autonomy's fault.

She claims, among other things, that Autonomy used misleading accounting tricks.

You're HP! Even if this is true, it is on leaderships' shoulders to have tasked competent accountants to go over the details with a fine toothed comb.

But sure - it is easier than saying "I'm Sorry".

My question here is: Can HP survive moving forward with someone who fails to take responsibility for bad decisions? Meg Whitman is the face of HP -- and as such, should take responsibility for a bad buy, apologize to shareholders for HP's failure, and figure out a plan to move forward.

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