Hewlett-Packard's $8.8 billion write-down from its Autonomy acquisition came as a shock to investors, but current and former HP employees that worked with Autonomy co-founder and CEO Mike Lynch aren't surprised by the revelation.
Lynch was shown the door in May after Autonomy reported fiscal second quarter results that HP CEO Meg Whitman described as "disappointing." But according to sources familiar with the matter, who spoke with CRN on condition of anonymity, Lynch missed HP's services revenue, renewals and new license targets for Autonomy by more than 90 percent during the quarter.
An HP spokesperson contacted by CRN declined to comment on this figure. But HP, which paid $11.1 billion to acquire Autonomy last August, says it was duped into overpaying for the information management software vendor.
HP said Tuesday more than $5 billion of the write-down is due to "serious accounting improprieties, misrepresentation and disclosure failures" HP found in its internal investigation of Autonomy.
[Related: HP Shuffles Autonomy Leadership, Departed Execs Cite Stifling Bureaucracy]
HP pointed to Autonomy accounting improprieties and employees' "willful effort" to inflate the company's value by classifying "negative-margin low-end hardware sales" as license revenue for IDOL, its core search engine technology, and using licensing deals with VARs to "create revenue where no end-user customer existed at the time of sale."
The negative-margin low-end hardware sales accounted for 10 percent to 15 percent of Autonomy's revenue, HP said.
One source close to HP, speaking on condition of anonymity, alleges Autonomy in some cases was booking revenue immediately, "which inflated revenue and earnings in the short run at the expense of future revenue and profit streams."
Lynch, who is setting up a London-based investment fund aimed at developing fledgling technology companies around the world, is categorically denying HP's allegations.
"Basically, we reject completely the assertion of HP. It's completely wrong," Lynch told All Things Digital Tuesday in an interview.
CRN's attempts to reach Lynch for comment were unsuccessful.
Autonomy was Britain's largest software company by market capitalization at the time of the acquisition and had recorded several consecutive profitable quarters. Mike Lynch was being referred to as the U.K.'s answer to Bill Gates, and his software had won the prestigious Queen's Award for Enterprise in 2009 and 2010.
While Lynch appeared destined to continue this success at HP, sources told CRN he began clashing with upper management shorty after joining the company last October.
The problems worsened in November after HP combined its Vertica high performance database group and Autonomy to form a new business unit called Information Management. In their first meeting with the Vertica staff, Lynch and other Autonomy executives made clear that Autonomy would be getting the lion's share of attention and that Vertica would be afforded second-class status.
"When Lynch spoke to the Vertica group for the first time, he said 'you guys are structured data, and 80 percent of the world is unstructured data, so we're going to divert 80 percent of this group's resources to Autonomy,'" said the source, who requested anonymity.
"Vertica not only would have suffered under Autonomy, we did suffer, for one really long month," said another source.
In March, Vertica CEO Chris Lynch left, and HP moved Vertica out of the Autonomy group. HP in September hired former Microsoft executive Robert Youngjohns to lead Autonomy.
HP says it has referred the Autonomy matter to the U.S. Securities and Exchange Commission's Enforcement Division and the U.K.'s Serious Fraud Office and says it will seek to recoup its losses from the Autonomy deal in civil court.
PUBLISHED NOV. 20, 2012
