The millionaire founder of former FTSE 100 darling Autonomy was forced to defend his reputation yesterday as the US computing giant Hewlett-Packard wrote off $8.8bn (£5.5bn) on its acquisition of the software firm and accused managers of "serious accounting improprieties".
The technology entrepreneur Mike Lynch, who set up Autonomy in 1996, sold it to HP for $10.3bn in August last year, making about £500m from his stake in the business. Mr Lynch, who left the US company in May, is worth £480m, according to the Sunday Times Rich List.
HP stunned markets yesterday as it said an internal investigation had found what appeared to be a "wilful effort on behalf of certain former Autonomy employees" to inflate the value of the company, and "to mislead investors and potential buyers".
More than $5bn of the losses are linked to "serious accounting improprieties, misrepresentation and disclosure failures", according to HP. The company has referred the matter to the Serious Fraud Office and US regulators to pursue a civil and criminal investigation against "various parties".
Mr Lynch said he was "shocked" by the claims, saying: "It's completely and utterly wrong and we reject it completely." He also said the huge write-down was a "distraction" from the worst results in HP's 70-year history. HP's shares slumped 11 per cent as the company tumbled to a $12.7bn full-year loss as a result of the charge. The company "intends to aggressively pursue this matter in the months to come".
The founder said he had not been contacted by HP, adding: "Look at the size of the writedown. If you have done meticulous due diligence with 300 people you can't get it that wrong."
The latest blow for the US group comes as it struggles to reinvent itself against a backdrop of shrinking PC and printer sales. HP was attracted by Autonomy's high-margin software, which allows users to search "unstructured" data sources such as emails and videos, as well as a roster of blue-clip clients including multinational corporations and government agencies. The deal was masterminded by HP's former chief executive Leo Apotheker, who said he was "stunned and disappointed" as news of the allegations emerged.
The investigation was triggered by an Autonomy whistleblower, who came forward following the departure of Mr Lynch, and carried out by PricewaterhouseCoopers, HP said. The claims centre on Autonomy allegedly booking low-margin hardware sales as much higher-margin software licensing revenues, making the company potentially appear more valuable to investors than it actually was.
The inquiry also focused on Autonomy's alleged use of software licensing sales to re-sellers – who sell on software to their own clients – to "inappropriately accelerate revenues" or, in a worst-case scenario, when no end user customers existed at the time of the sale. City analysts who follow the technology sector say this practice is known as "stuffing the channel".
The uncovering of the alleged malpractice immediately raised questions over Deloitte's auditing of Autonomy. Meg Whitman, HP's current chief executive, said: "What I will say is that the board relied on audited financials. Audited by Deloitte – not 'Brand X' accounting firm, but Deloitte. During our very extensive due diligence process, we hired KPMG to audit Deloitte. And neither of them saw what we now see after someone came forward to point us in the right direction."
Ms Whitman said HP remained "100 per cent" committed to Autonomy but added that "it has got lower revenues, a lower growth rate and lower margins" than originally thought.
Deloitte noted the claims but refused to comment further, on client confidentiality grounds.
It said: "We will co-operate with the relevant authorities with any investigations into these allegations."
The Serious Fraud Office declined to comment.
Hewlett-Packard and Autonomy bosses and the lost billions
Frank Quattrone, founder of the tech-focused investment bank Qatalyst and one-time star Wall Street tech analyst, sounded out potential US buyers for Autonomy last year, including Oracle. Mr Quattrone, who once faced charges of obstruction of justice before striking a deferred prosecution agreement in 2006, made a controversial intervention to try to sell Autonomy to Oracle in January last year, going behind Mike Lynch's back to pitch the UK firm to Oracle's boss, Larry Ellison. Mr Ellison told investors in April last year that the then $6bn price tag for Autonomy was "absurdly high", leaving the field open for HP – at the time headed by Leo Apotheker – who jumped at the chance of landing the data business. Even after Mr Apotheker was ousted and Meg Whitman took the helm, HP stuck by the deal in the face of criticism it was paying too much.
Celebrated programmer: Lynch
Mike Lynch's exuberance when he sold his life's work, Autonomy, to HP was clear. "Imagine fighting a war with a gun and someone shows you into a hangar where there is a fighter jet," he said. But few who knew his entrepreneurial spirit thought he would stay on for long when his firm was soaked up into an American corporation. Mr Lynch has been celebrated for creating Autonomy based on his doctoral thesis while studying at Cambridge University. The son of a nurse and a firefighter created a system for sorting unstructured data such as emails and recorded phone calls – essential for lawyers quickly preparing for a case. Hesitant, but dry-witted, and often dressed in his trademark beige trousers and blue blazer, he eschewed rich trappings such as fast cars, instead ploughing cash from the company's sale into bolstering the herd of red poll cows kept on his Suffolk farm.
Cleaning up the mess: Whitman
New Yorker Meg Whitman has been in charge of HP for little more than a year. The Autonomy claims are an unwelcome distraction from efforts to push the business away from flagging printer and PC markets.
A graduate of Princeton University and Harvard Business School, the 56-year-old cut her teeth at the Walt Disney Company in the 1980s before adding the likes of Procter & Gamble and Hasbro to her CV.
As chief executive officer of eBay from 1998 to 2008 she oversaw the rapid growth of the online auctioning site from just 30 staff to more than 15,000 employees and $8bn in sales.
In February 2009 she launched her bid to become Governor of California as the Republican candidate – spending a record $144m of her own cash – but lost to the Democrat Jerry Brown in 2010.
Ousted boss: Apotheker
Swapping Paris for Palo Alto, German-born Leo Apotheker was a fish out of water in the 10 months spent at the helm of HP. In trying to make sense of the company's jumble of data servers, printers and laptops, he proclaimed that HP would embrace cloud computing, where companies store huge volumes of data for third parties. Higher-margin software was the final piece of the jigsaw, no surprise for a man who spent 20 years at SAP, which supplies inventory and payroll software. Although analysts believe HP should jettison its PC and printing arm, just as rival IBM did several years ago, Mr Apotheker had little chance to reshape one of Silicon Valley's longest-established firms further after he was charged with overpaying for Autonomy.
"The only way to succeed in this kind of job, in my humble opinion, is not to believe that you are indispensable," he said presciently, months before exiting.