Who's Really to Blame in HP's $8.8-Billion Meltdown?

Hewlett Packard has accused Autonomy, the big-data software company it bought in 2011 that nearly wiped out its quarterly earnings this week, of lying about its finances, while Autonomy blames HP for mismanagement. Both the Securities and Exchange Commission and the FBI are now investigating the claim, according to an anonymous source, after which we might have some answers on this charge. Until then, there are two ways to see this $8.8-billion meltdown—the HP way and the Autonomy way. Read on and decide who to believe. 

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The Way HP Sees It: Autonomy Lied About Making Money

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Autonomy made a "willful sustained effort" to inflate its revenue and profit, in the words of HP CEO Meg Whitman. "This was designed to be hidden," she continued. How, exactly?

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  • Autonomy inflated its sales numbers by fudging reported losses or claiming profits where there were none, as DealBook's Quentin Hardy and Michael De La Merced explain. "They used low-end hardware sales, but put out that it was a pure software company," said John Schultz, HP's lead council. "They put this into their growth calculation."
  • An anonymous HP official said that this hardware was sold at a 10 percent loss, but that the company inflated the margins and underplayed expenses by reporting these as software sales.
  • HP also claims that Autonomy reported sales to customers that didn't exist or said they had licensing revenue before it came in. 
  • And finally, Autonomy had horrible customer relations, says HP. "They didn't invest in R&D; they didn't have regular software releases; they weren't transparent with a road map of where they were going; they didn't seek customer feedback," a Forrester analyst told Hardy and De La Merced. "Customers complained, but the promise of managing all their information and making better decisions was so attractive. They bought more."

While this makes a convincing case, Bloomberg's Jonathan Weil doesn't buy it. Going through the numbers, he thinks that HP has a lot more explaining to do before it alleges these things. 

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The Way Autonomy Sees It: HP's Management Is a Mess

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Autonomy's former CEO Michael Lynch flat-out denies HP's claims of inflation, and an analyst from Deloitte, who handled the companies accounting, "categorically denies" knowing about any intentional accounting errors, reports The Wall Street Journal's Ben Worthen. "We completely reject the allegations," said Lynch. "As soon as there is some flesh put on the bones we will show they are not true." Lynch says HP destroyed it over the last year because of "the petty infighting at H-P." He wouldn't be the first to talk about HP's bad management. When layoffs hit last March it came up. Plus, the deal itself had led to "squabbles among company's directors," note Hardy and De La Merced. 

The two companies didn't quite get along after the deal went through, either. Lynch kept Autonomy away from HP's main Palo Alto campus. "He told his people, Meg, anyone who’d listen, that H.P. should not get involved with Autonomy," an executive who worked with both companies who asked not to be named to preserve professional relations told DealBook. "Meg figured we should leave them alone, so they could stay entrepreneurial." Though, if the CEO kept the company so separate, it's hard to see how HP mismanagement could have led to Autonomy's big losses. When the two had to work together, they did not cooperate well, say Hardy and Merced. And sales did plummet once Autonomy joined HP. 

So those are the two sides of the tale. Like any conflict, we imagine both parties have some legitimacy and also aren't quite taking as much blame as they deserve.

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