Mike Lynch, the HP – Autonomy Deal and M&A Due Diligence: Part 2 – Post Closing

Thomas Fox

Compliance Evangelist

We continue our exploration of the continuing saga of the most disastrous business deal of the 21st century, the HP acquisition of Autonomy. Yesterday, we reviewed the history of the transaction up to the time of closing and subsequent termination of HP Chief Executive Officer (CEO) Leo Apotheker, for pursuing the deal and get rid of HP’s PC-manufacturing business.

Write Down

Within one year, then CEO Margaret Whitman and other HP executives went to the UK to try and figure out what went wrong with the transaction, the integration or both, and two weeks later Lynch was fired by HP. Within weeks of the Lynch firing, HP said, “the company heard an allegation from an Autonomy executive that Autonomy manipulated its numbers. That set-in motion the process that led to HP’s November 2012 write-down and allegation of improper accounting by the software firm.” Moreover, as reported by Ben Worthen in the Wall Street Journal, HP wrote down $8.8bn of its $11bn purchase value of the UK Company Autonomy. HP said, “that an internal investigation had revealed “serious accounting improprieties” and “outright misrepresentations” in connection with U.K. software maker Autonomy.” Further, according to Whitman, ““There appears to have been a willful sustained effort” to inflate Autonomy’s revenue and profitability. This was designed to be hidden.” Speaking more bluntly (as always) Francine McKenna, in her forbes.com article, entitled “Hewlett-Packard’s Autonomy Allegations: A Material Writedown Puts All Four Audit Firms On The Spot”, said “That’s PR-speak for fraud.”

Not to be outdone, Worthen reported, “Michael Lynch, Autonomy’s founder and former CEO, fired back hours later, denying improper accounting and accusing H-P of trying to hide its mismanagement. “We completely reject the allegations,” said Mr. Lynch, who left H-P earlier this year. “As soon as there is some flesh put on the bones we will show they are not true.”” In other words, Lynch accused HP of mismanaging his former company and destroying its value in less than 12 months. It should also be noted that the Autonomy acquisition was pushed through by the former CEO of HP, Leo Apotheker, not the current CEO.

DOJ and SFO Investigations

In November 2012, the US Department of Justice (DOJ) opened an investigation into the HP-Autonomy deal. According to the BBC, the DOJ opened its investigation at the request of HP. The UK Serious Fraud Office (SFO) also opened an investigation at the time. At the time HP said, “As a result of the findings of an ongoing investigation, HP has provided information to the UK Serious Fraud Office, the US Department of Justice and the SEC related to the accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP’s acquisition of Autonomy.” It was this request and investigation which led to the recent court ruling in the UK which ordered that the former Autonomy CEO Lynch could be extradited to the US. It also led to the trial of former Autonomy CFO, Sushovan Hussain, who was found guilty by a San Francisco jury.

According to the BBC, Hussain was “found guilty last year of 16 counts of securities and wire fraud.” Mr Hussain was also fined $4m and must pay an additional $6.1m in forfeiture. HP claims that Autonomy inflated its revenues and a court found that Mr Hussain made false statements to investors about the company ahead of the deal in 2011. Judge Charles Breyer said that in his position as Chief Financial Officer (CFO), Mr Hussain had “corrupted a number of innocent people” and “could direct people who were subordinate to [him] to commit these types of offences”.

The SFO closed its investigation into the matter in 2015. Reuters reported that the SFO “closed its investigation into the ill-fated sale of British IT firm Autonomy to Hewlett-Packard in 2011, saying there was insufficient evidence for a realistic prospect of conviction.” The SFO said at the time “In respect of some aspects of the allegations, the SFO has concluded that, on the information available to it, there is insufficient evidence for a realistic prospect of conviction.” The SFO did note that it “had ceded jurisdiction over the case to U.S. authorities.”

UK Fraud Trial

Next came the still ongoing civil fraud action by HP against Autonomy founder Lynch and CFO Hussain. In this civil case, HP claimed that both Lynch and Hussain had fraudulently inflated the value of Autonomy before the sale. Lynch denied these allegations stating, according to the BBC, “There was no fraud at Autonomy. The real story is that HP, after a history of failed acquisitions, botched the purchase of Autonomy and destroyed the company, seeking to blame others. Mike will not be a scapegoat for their failures.” The BBC article when on to state, “Mr Lynch’s lawyers said the case is a “dispute over differences between UK and US accounting systems” and “certain business judgements”.”

Indeed, Lynch and Hussain filed counterclaims in the civil court “for at least $125m in damages against HP for “a series of false, misleading and unfair public statements” about his alleged responsibility for supposed accounting irregularities and misrepresentations at Autonomy.” Lynch’s counsel argued at the start of the civil trial, “that HP “mishandled the acquisition”, adding: “Even the announcement of the bid was poorly managed, as it coincided with the announcement by HP of poor trading results, deteriorating prospects and the closure (or potential disposal) of significant parts of its business.””

Testimony has now been completed in the UK civil case and all parties are awaiting for a judgment from the UK High Court. It had been expected by the end of Q2 2021 but as noted by The Register, there are thousands of pages of documents, numbing billing and financial records, expert reports and witnesses for the High Court to review before it issues its final ruling. Whatever that UK ruling is, there will surely be an appeal to the UK Court of Appeals.

Join us tomorrow where we consider some of the other players and lawsuits and the extradition order.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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