Did Michael Lynch Hang Himself on Next Startup by Blaming HP for Autonomy’s Bad Deal?

Hewlett-Packard asked the Securities and Exchange Commission as well as the Federal Bureau of Investigation to investigate Autonomy, the British company they acquired last year, who they now are suspecting of fraudulent acts.

HP’s stock plummeted yesterday after they posted their shocking financial report, which revealed how Autonomy missed revenue expectations by a whopping 90 percent.  They announced an $8.8 billion write-down related to their acquisition of Autonomy, claiming the company practiced accounting improprieties that led them to believe that the company is financially doing well.  They soon found out that they’ve paid too much for a company that hasn’t impacted HP’s bottom line.  Autonomy CEO Michael Lynch of course denied HP’s allegations, stating that everything was there for HP to see before the acquisition, and that HP’s misfortune was due to mismanagement.

An industry divided

Check out SiliconANGLE founder and CEO John Furrier’s full analysis on the issue.
While the industry is divided, our analysts do not believe Lynch’s claim that due diligence is enough when fraud comes into the picture.

Others in the industry believe that HP is the one at fault since, even before the acquisition, Autonomy publicly disclosed their total assets which amounted to only $3.5 billion.  Also, HP reported a goodwill of $6.9 billion.

“Goodwill is the bookkeeping entry that a company records when it pays a premium to buy another company,” Jonathan Weil of Bloomberg stated.  “More precisely, it’s the difference between the purchase price and the fair market value of the acquired company’s net assets. Goodwill can’t be sold by itself. The goodwill in this instance tells you that HP paid $6.9 billion more than it believed Autonomy’s net assets were worth.”

Weil stated that HP wrote down those goodwill entries not because Autonomy lied to them, but because they “knew Autonomy’s identifiable assets were worth much less than it paid, ultimately blaming Autonomy for bad accounting.

Lynch hangs himself?

In an interview with AllThingsD, Lynch stated that he wasn’t aware of the issue and all they ever got from HP was the press release.  No one has contacted them legally or made it known that they are being investigated.

Lynch recounted how HP mismanaged Autonomy, resulting in employees and executives leaving the company when customers were left without a choice but to buy from HP’s Enterprise Services Group, ripe with a 30 percent markup on the software.

“What you saw was a situation where hundreds of the Autonomy staff left — remember, it was a pretty small company with a small staff — they all left, and the senior management team left. There was significant mismanagement of the asset. So the quarter when the numbers at Autonomy went south was the quarter that HP took over and took over the sales process.

“They did things like, if the customer had an enterprise sales agreement with Autonomy, they could no longer buy through Autonomy, they had to buy through HP’s Enterprise Services Group. And ES insisted on putting a 30 percent markup on the software. So, suddenly, established customers had to pay 30 percent more for that software. And that is just one of a long list of examples,” Lynch stated.

Lynch went on to say Autonomy’s low revenue months were those in which HP started to takeover.  After that, things just continued to go down the drain.

A troubled future for Lynch’s next projects

Lynch has managed to land at least one big deal in his life, selling Autonomy to HP.   But will this scandal keep Lynch from raising capital for another startup?  It could very well hinder investor relations for any new projects Lynch launches in the future.  In fact, rumor has it Lynch is already working on a fresh project, one hat now seems like a very lofty goal.

“It is being talked about that Mike Lynch is trying to raise $1billion vc fund for UK,” Furrier says.  “This scandal might just kill that deal as the LPs will run for the hills.”

Indeed, HP and Lynch have reeled in one whopper of a scandal here, and it could fare poorly for Lynch moving forward.  And between HP’s previous CEOs and a string of questionable investments, the Autonomy deal seems to raise more questions than answers.  As former Sun Microsystems CEO Scott McNealy puts it,  “I support Meg Whitman, she’s a great leader, but it takes as long to fix something as you spent screwing it up.”