Autonomy founder Mike Lynch has been thrust into an uncomfortable spotlight.
HP CEO Meg Whitman has accused him and other former members of the management team of Autonomy, the software company it paid $11.1 billion for last year, of fraudulent accounting. Inflated revenues duped her and other board members into paying too much for his company, she has said, and forced HP into a $9 billion writeoff.
In an interview with Business Insider, Lynch denied the charges and offered a different point of view. Under Whitman, he said, HP made one bad business decision after another, and this is what really destroyed Autonomy's value.
He told us:
- Meg Whitman got the CEO job because of an inside coup by HP execs that ousted the previous CEO, Léo Apotheker, a former software executive who championed the Autonomy deal.
- These execs feared Apotheker's plan to spin off the hardware business in favor of software.
- This lead Whitman to abandon the software strategy, which left Autonomy and Lynch in the lurch.
- HP's convoluted bureaucracy created situations where its own salespeople couldn't sell Autonomy.
- The infamous whistleblower who reportedly alerted HP to Autonomy's accounting problems couldn't be the person HP claims.
Here is a lightly edited transcript of the conversation. (And don't miss part 1 of this interview, where Lynch says HP's accusations don't add up.)
Business Insider: What was it like for you at HP after the acquisition?
Mike Lynch: HP, as is well known, has got a lot of internecine warfare that goes on between the divisions and the board members. When we got involved the CEO was Léo [Apotheker] and he was working closely with the CTO, Shane Robison. They decided that HP needed a radical new direction and they wanted to do an IBM-type turnaround. That meant they were going to point HP at software, high value, high margin, rather than at the traditional hardware business, which Léo announced that he was spinning off.
What then happened was an absolutely classic HP coup d'état. Léo and Shane found themselves out on their ear and the other faction is now in power. The problem is that they they just committed to buying a very expensive, high-octane software asset.
Léo and Shane's plan had Autonomy heading up the HP Software division. Meg [Whitman] comes in and there's no handover of what the plan is. So the plan is to start again from scratch.
So now HP Software and Autonomy are set to run side-by-side. Then all of the issues that you get between HP divisions start to appear.
BI: What kinds of problems?
ML: For example, there are emails that go out from Software saying that people can't sell Autonomy software, the salesforce mustn't sell it. Then there are situations where the hardware division says, "You mustn't sell Autonomy because its not been specified for the hardware." Then there are situations where Services say, "We own that customer, therefore, even though you've been selling to them for years, Autonomy, we're going to have to add 30% markup before you can talk to the customer."
Another interesting thing happens. If you are a HP salesperson and you sell a third-party product that's competitive to Autonomy, you get commission. If you sell HP's own product, you don't get commission.
This continues. It gets worse and worse. It gets to the point where it takes over the sales process. Suddenly, the sales prices all go up because of these margins that are added by the divisions.
BI: What else can you tell me about the infamous infighting you describe?
ML: There are other problems like trade shows—is it HP Software or is it Autonomy, who gets on the stage? A lot of argy-bargy, as we say over here, organizations trying to trip up other parts, not working in unison.
For example, we created an appliance with Autonomy with Dell in a matter of weeks. HP says it's going to take a year and half.
Lots of bureaucracy gets brought in. The kind of talent that we have, which is great, playful, lively young talent, starts to leave in droves and we lose a few hundred of the top people.
BI: And then you left?
ML: The whole management team finally gave up after [this] series of problems. I was actually the last one to go. So what you have then is a company where you've lost the management. And the important thing about an Autonomy is that the talent is everything. So then what happens is that the performance of the business starts to deteriorate.
Ultimately, what's left is a writedown.
It's important to realize that the first two quarters of Autonomy inside Hewlett-Packard the results were pretty good and were in line with Autonomy's general projections. It was only when the sales process got taken over by the rest of HP that the thing started to have real problems.
BI: HP indicated there was a whistleblower who alerted them to problems Autonomy's books. What do you know about this person?
ML: We don't know who the whistleblower is. The strange thing is that there's no one left from the senior management team at Autonomy. What we've been told, and I don't know if this was accurate, but the name I've been given is not an Autonomy person. It's an HP Software person who was brought in a month before I left. If that's true, this whistleblower is not what they've made out to be because they would not have been around at the time when all these things were supposedly happening, although they've been described as a senior manager of Mike Lynch's.
So an interesting question for Meg would be, "Can you confirm that the whistleblower has worked at Autonomy during the period under question, i.e. 2009-2010?" If the answer comes back as "No" then the whisteblower really isn't someone who was there firsthand. They are someone who has come in from HP with an agenda.
BI: What are your thoughts about Autonomy's future now?
ML: Let's not forget that HP is a company in dire crisis. The share price since Meg's been involved is down, what, 60%? Every metric is falling off the cliff. They just lowered their guidance. What they need to do is concentrate on fixing the core business. They need to stop coming out with distractions. First fix the core business and then you'll create an environment where the Autonomys of the world can thrive.
BI: How should she fix the business? Léo's plan of software first?
ML: I liked that plan and it worked at IBM, but hey, let's just have a plan. At the moment, I couldn't tell you what the strategy was and I was sitting at the strategy meetings until May. What is the plan? What's the strategy? The interesting thing is, [last Tuesday], we didn't hear about strategy. We were all deflected off to the reclassification of $100 million of their revenues. They've got to fix all this stupid internecine warfare between the divisions and start working as one company. If you could get all the wonderful things at HP to work together, it would be great.
One of my colleagues has an analogy for what it was like dealing with them. He said it was like getting on an airplane. It takes off and you look out the window and the engine is on fire and you get up to tell them and the pilots are having a punch-out.
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