Friction was apparent between Hewlett-Packard Co. (HPQ:US) Chief Executive Officer Meg Whitman and Autonomy Corp. founder Mike Lynch within weeks of their companies’ union, according to documents seen by Bloomberg News.
Lynch e-mailed Whitman about three weeks after the sale of his company closed to complain Hewlett-Packard was putting up roadblocks to sales practices Autonomy considered standard, saying “it took us two man-weeks to do this” with Dell Inc.
“This, I’m afraid to be blunt, is a bunch of baloney,” he wrote on Oct. 26, 2011, according to a copy of the message seen by Bloomberg. Whitman responded that they should talk about it by telephone, according to a person familiar with the exchange.
Autonomy’s practice of selling hardware from partners like Dell at a discount and how it accounted for those sales emerged as a flashpoint a year later. That was when Hewlett-Packard took an $8.8 billion writedown on the deal, citing activities like booking hardware sales as software among instances of “serious accounting improprieties, disclosure failures and outright misrepresentations.”
Lynch has denied the accusations and said Autonomy struggled because Hewlett-Packard stymied the Cambridge, England-based software company’s sales. According to the e-mail, one unit was stalling on promoting or selling Autonomy products because they hadn’t been certified for its servers, a process that would take a year and that the unit had no resources set aside to accomplish. Meanwhile, Autonomy was recommending Hewlett-Packard servers to Autonomy customers, Lynch wrote, saying they needed to work more closely together.
“The next chapter looks exciting but it can’t be half done. I am more convinced than ever that by combining Autonomy with HP the right way we can continue to magnify its exceptional growth and margin profiles,” Lynch said in the e-mail. “I’m afraid this is down to you as well as me.”
Spokesmen for Hewlett-Packard and Lynch, who was ousted in May 2012, declined to comment on the exchange.
In the November 2012 writedown announcement, Hewlett-Packard General Counsel John Schultz pointed to the arrangement with personal-computer maker Dell to sell hardware at a discount as one of the things hidden from Hewlett-Packard that contributed to $200 million in mislabeled or false sales.
Hewlett-Packard has since eased up on that aspect, last week acknowledging in a statement it “eventually learned that a portion of Autonomy’s revenues were related to hardware sales.”
Still, Hewlett-Packard “knew nothing of the accounting improprieties, misrepresentations and disclosure failures related to such sales until after a senior Autonomy executive came forward,” the Palo Alto, California-based company said.
The accounting for the sales was detailed and approved by Autonomy’s auditors at Deloitte LLP long before Hewlett-Packard bought the company, according to a report from October 2009 seen by Bloomberg. Deloitte called it a “new and significant longer term market opportunity,” according to the document.
Autonomy had agreed to jointly sell hardware and its own software to large financial institutions and the loss on the hardware was “fully recognized in the result for the period,” according to that report. Deloitte also signed off on accounting for hardware losses as a sales and marketing expense.
E-mails among Autonomy officials, Hewlett-Packard’s finance team and auditors dating to November 2011 show Hewlett-Packard had been informed of the hardware sales and how they were accounted for long before the whistle-blower approached them in spring 2012.
The Autonomy deal was negotiated by Whitman’s predecessor, Leo Apotheker, and Whitman took her post less than two weeks before the sale closed. Shareholders have sued Hewlett-Packard over the writedown, alleging its board and Whitman ignored warnings of accounting irregularities.
Whitman, who joined the Hewlett-Packard board (HPQ:US) in January 2011, said when she took the CEO post that the company remains “firmly behind” the plan to buy Autonomy. She’s named in lawsuits for misleading investors by not disclosing what the whistle-blower said earlier, saying Autonomy would be “very profitable” and blaming poor results on integration issues.
Hewlett-Packard is speaking with shareholders’ lawyers on a possible settlement, a person familiar with the talks said.
Hewlett-Packard investigators believe Autonomy sold partners’ hardware at a steep discount and called it part of a software deal to artificially inflate revenue, a person familiar with the probe said, asking not to be named because the inquiry is confidential.
While the hardware was meant to be a loss-leader that spurred software sales, that didn’t always happen, the person said. One December 2009 deal entailed reselling Dell servers to New York-based Morgan Stanley (MS:US), the person said, citing e-mails found in the probe. Autonomy executives pushed for the paperwork to say it included Autonomy software. Morgan Stanley refused, insisting on removing software references, the person said.
A spokesman for Morgan Stanley declined to comment on the sale or discussions of the purchase order language.
The details of Autonomy’s work with Morgan Stanley were always available to Hewlett-Packard, a Lynch spokesman said.
“The Morgan Stanley deals HP refers to were all properly accounted for, transparently handled and correctly audited,” a spokesman for Lynch said. “All the detail is clear as day in the audit reports and sales ledgers where the hardware is booked as hardware, all of which HP has had full knowledge and visibility of since it acquired the company.”
To contact the reporters on this story: Amy Thomson in London at email@example.com; Suzi Ring in London at firstname.lastname@example.org
To contact the editors responsible for this story: Heather Smith at email@example.com; Kenneth Wong at firstname.lastname@example.org