Wednesday, November 21, 2012

Dumb and Dumber: HP and Autonomy Dueling PR

So much has been written about HP's fiasco in voluntarily, with open eyes agreeing to acquire Autonomy for more than $10 billion, which had no grounding in any reality.  Here are some concluding observations, ahead of getting ready for Thanksgiving.

  • Autonomy founder Dr. Mike Lynch is a quant and a promoter. As the Wall Street Journal Deal Blog noted, Silicon Valley's iconic deal maker Frank Quattrone shopped Autonomy to Oracle's Larry Ellison and former HP CEO Mark Hurd.  Lynch's protestations to the contrary are laughable and not worthy of someone whose academic discipline revolves around accuracy and precision. Oracle laughed at a $6 billion valuation. Slowing growth and the evolving market cachet on "big data" made the timing right to pitch a sale.
  • Ten out of the current eleven member HP board, including the current CEO Meg Whitman, hired CEO Leo Apotheker, who was clearly unsuited to be the CEO of a mature public company in need of a turnaround.  This same board acquiesced, or perhaps even advocated, the acquisition of Autonomy for the outrageous price paid.  While Apotheker was discharged, there has been no other senior executive management or board accountability for this, and other, value-destroying acquisitions. 
  • CEO Whitman's laying accountability at the feet of an HP strategy officer is unseemly and shows no respect for the intelligence of the stakeholders.  Whatever PR flak suggested this cop out should be fired. Saying that the solution is to now have a different strategy officer report to the CFO makes the board and executive team seem like idiots.  A reporting line in an org chart caused a loss of of $8.8 billion in value?  I don't think so.
  • What about the CFO?  A strategy officer is looking at the merits of entering into high powered analytics through acquisition.  The officer might be looking at product synergies and opportunities for cross-selling. Examining the financials of a target company, looking at its controls and financial reporting practices, seeing how its results would translate into HP, thinking about integration of financial reporting, and making projections about synergies and potential dilution are within the CFO's bailiwick and nowhere else.  Deloitte and KPMG would per force have had to report their findings to the CFO and to the Audit Committee Chair.  The whole strategy officer taking a fall discussion is a red herring.
  • As Jim Chanos and others have done, looking at the 2010 Annual Report for Autonomy raises a lot of questions.  However, looking at the financial statements alone is not sufficient; they have to be read with the notes to the statements, as a whole.  The notes are poorly written and uninformative.  Under these circumstances, the two accounting firms should have been able to uncover the accounting deficiencies now claimed as deceptions before the purchase. The Audit Committee Chair should have demanded nothing less.  Revenue recognition is widely recognized by any finance MBA as a major issue for software and technology companies with multi-element product sales and licensing. 
  • The culture and executive compensation practice at Autonomy should have been another warning sign, quite apart from the financials.  
  • At the HP Analyst Day, an HP executive made some carefully worded, but telling comments about Autonomy.  He said that their processes were not reproducible or scalable.  One of his goals was to bring discipline and process to all their functions, including product development.  These were clearly warning signs of things to come. How were product development issues not spotted in a due diligence process?  
  • Having HP's top lawyer issue a press release about clawing back value for shareholders is not comforting.  Recently, a small cap technology company I'm familiar with did a relatively small investigation into an issue at a foreign subsidiary; it generated $2 million in non-recurring expense in a quarter.  I can't imagine what this investigation is going to cost.  It will also now figure in non-GAAP earnings.  It is going to be an expensive, distracting and potentially embarrassing fight with no net benefits. 
  • As we posted recently, the entire board should voluntarily request not to be renominated for election.  The future board should not be filled with homogeneous Valley pals and insiders. It would be appropriate, in my opinion, for CEO Whitman to voluntarily forgo current year incentive compensation  for her role as a director in hiring Apotheker and in acquiring Autonomy.  In previous interviews, she has said she didn't come back to HP for the job or money, but for the challenge.  Giving back incentive compensation would acknowledge that the CEO wasn't up to the acquisition challenge as a director and that nobody is above being held accountable.  The effect on HP's corporate culture would be breathtaking. 
  • Good things are happening inside the company.  It is time to play the hand the company has now for all its worth and to move on.

To move into Thanksgiving with some more uplifting reading, here's a link to Japanese views on gratitude, as specifically integrated into Morita Therapy

No comments: