Autonomy Corp. founder Mike Lynch was planning to use his reputation as one of the most successful European entrepreneurs to help startups get off the ground. Now, he’s fighting allegations of accounting failures that threaten his status as the pin-up of British technology.
Hewlett-Packard Co (HPQ). (HPQ), which last year agreed to buy Lynch’s company for $10.3 billion, yesterday took an $8.8 billion writedown and said some former members of Autonomy’s management team used accounting improprieties and disclosure failures to inflate the value before the deal.
Lynch rejects the allegations and has mounted a public campaign against his accusers since yesterday, appearing on television and in newspapers denying Hewlett-Packard’s version.
“After being ambushed by all this yesterday, I’ve had a chance to look at some of the things that they’re saying -- it just doesn’t add up,” Lynch said in an interview. “HP is looking for scapegoats, and I’m afraid I’m not going to be one of those.”
Hewlett-Packard’s general counsel said yesterday that more than $200 million of Autonomy’s revenue had been recorded improperly over a two-year period. Lynch said today that the alleged impropriety wouldn’t have distorted profit and sales or led to the $5 billion decline in Autonomy’s value that Hewlett- Packard attributes to accounting flaws.
Lynch, 47, founded Autonomy as a spinoff from the University of Cambridge in 1996 and built it into the U.K.’s second-largest software company with customers including Coca- Cola Co. and the U.S. Securities and Exchange Commission. His technology, enabling the search of a broad range of information, known as unstructured data, including e-mails, music, video and social networks such as Facebook Inc. (FB), became a hit with organizations seeking to organize increasing amounts of data and information.
“Lynch was the poster child in the sense that he was considered the Bill Gates of the U.K. and the allegations damage his reputation,” said Espirito Santo Investment Bank analyst Vijay Anand. “His experience in the software industry would be beneficial to many budding entrepreneurs, not just his reputation but his contacts.”
When Hewlett-Packard bought Cambridge, England-based Autonomy, it praised Lynch for his “highly profitable and globally respected software company, with a well-regarded management team” and a “team of brilliant scientists.”
Now, Hewlett-Packard is threatening civil litigation and has referred the accounting irregularities to U.S. and U.K. regulators. The flawed accounting practices were disclosed by a senior executive at Autonomy after Lynch departed in May, the company said.
The FBI, responding to an inquiry by the U.S. Securities and Exchange Commission, is looking into Hewlett-Packard’s allegations, according to a person familiar with the matter, who asked not to be identified because the matter wasn’t public.
Lynch planned to set up a technology investment fund that will back young firms, people with knowledge of his plans said in July. He aims to tap the expertise of other former Autonomy executives for the London-based fund, the people said, asking not to be identified as the plans are private.
To start Autonomy, Lynch abandoned an academic career as a research fellow at Cambridge University after obtaining a PhD in mathematical computing. The Cambridge grad had focused his early research on the mathematical theories of the 18th-century theologian and mathematician Thomas Bayes, who sought to refine the study of probability.
Autonomy’s success made Lynch one of the best-known British technology executives. He was named “Entrepreneur of the Year” by the Confederation of British Industry in 1999 and in 2000, Time magazine named in as one of the 25 most influential technology leaders in Europe.
Lynch was awarded an Order of the British Empire for services to Enterprise in 2006. The same year, he was appointed as non-executive director to the board of the British Broadcasting Corp., the world’s biggest public broadcaster. After he agreed to sell Autonomy, he told the new owner to preserve the culture of his brainchild.
“Autonomy has a very different culture, a very high-speed culture,” Lynch said at the Bloomberg Enterprise Technology Summit in London in December last year. “It’s a company that needs to be left to do that.”
Hewlett-Packard Chief Executive Officer Meg Whitman had compared the parent company to a “mother tiger” not rolling on its cub, Lynch said at the time. She told her executives “not to smother” Autonomy, Lynch said in an interview at the same conference. At the time, he defended the deal, saying that Autonomy now had access to the “toy store” of HP’s hardware.
The charge is another blow for Hewlett-Packard, which is already suffering from management turmoil and slowdowns in its personal-computer, printer and technology-services businesses. Former Chief Executive Officer Leo Apotheker, 59, agreed to buy Autonomy to diversify away from hardware and expand in software for corporations. Apotheker left in 2011 after less than a year on the job following repeated strategy shifts and forecast cuts.
There were warning signs that Lynch didn’t fit in with his new U.S. owners early on. After saying he planned to stay on with Autonomy for a couple of years in September 2011, after the HP acquisition, the company announced Lynch’s departure eight months later amid declining license revenue at the unit.
Lynch had also clashed with an earlier suitor, Oracle Corp. (ORCL), which said he had misrepresented meetings with executives about a takeover.
Oracle issued a statement in September that said “either Mr. Lynch has a very poor memory or he’s lying,” and put his presentation to Oracle executives up on its website. Oracle said it didn’t make an offer for Autonomy because its valuation was too high. Lynch had said Autonomy’s management never offered the company to Oracle.
Autonomy misrepresented its gross profit margin and also falsely created or miscategorized more than $200 million in revenue over a two-year period starting in 2009, John Schultz, Hewlett-Packard’s general counsel, said yesterday. Autonomy was reselling Dell Inc. (DELL) computers and counting those sales as software revenue, he said. Some sales were also fabricated through resellers, according to Schultz.
Espirito Santo’s Anand said some people had always been wary of Autonomy’s ascendency.
“It was most certainly in two camps: one who were fans of Autonomy and its management team just because the software was very powerful,” he said. “The second camp didn’t believe the story, felt it was too good to be true and had historically based concerns on some of the accounting practices” because “Autonomy made a few acquisitions and once you make acquisitions, it’s difficult to get a precise bead on the underlying revenue growth.”
While some people questioned Autonomy’s growth, it didn’t stop Lynch becoming a European entrepreneurial superstar with a reputation worth fighting for.
“From a startup, Autonomy became an FTSE 100 (UKX) company within 10 years,” Anand said. “He was very highly regarded. His thoughts and his vision on where the software industry was heading, people obviously took that seriously.”
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