Autonomy Founder Defends Sales Practices Amid HP Claims

Mike Lynch, who founded the British software company accused by Hewlett-Packard Co. (HPQ) of falsifying finances, said that while he may have used some of the contested accounting and sales methods, they were all legal.

One of the claims levelled by Hewlett-Packard is that Cambridge, England-based Autonomy mischaracterized some revenue from unprofitable hardware and improperly included it as “license revenue.” The U.S. company said this week it recorded an $8.8 billion writedown related to last year’s purchase of Autonomy and that more than $5 billion of that impairment charge was the result of accounting practices.

“Essentially we would offer a discount on hardware, especially if people were buying software or a big long-term partner,” Lynch said in an interview. “A bank would buy software from us every other quarter, but they would also buy hardware from us.”

Lynch, who said he hasn’t yet hired a lawyer, has mounted a public campaign against his accusers, appearing on television and giving interviews rejecting Hewlett-Packard’s version of events, to defend his reputation as one of Europe’s most successful technology entrepreneurs. Hewlett-Packard this week called Autonomy’s practices a “willful effort” to inflate financial metrics and mislead investors.

Photographer: Chris Ratcliffe/Bloomberg

Autonomy Corp. founder Mike Lynch said, “Essentially we would offer a discount on hardware, especially if people were buying software or a big long-term partner,” Close

Autonomy Corp. founder Mike Lynch said, “Essentially we would offer a discount on... Read More

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Photographer: Chris Ratcliffe/Bloomberg

Autonomy Corp. founder Mike Lynch said, “Essentially we would offer a discount on hardware, especially if people were buying software or a big long-term partner,”

Hewlett-Packard said the misrepresentations caused them to value Autonomy incorrectly before the deal, which ultimately cost the Palo Alto, California-based company $11.1 billion.

John Schultz, Hewlett-Packard’s general counsel, has said among those practices, which accounted for $200 million in miscategorised or false revenue, was reselling Dell Inc. (DELL) hardware and recording them as software revenue.

‘Highly Complex’

Lynch denied miscategorizing revenue. The company treated some of the costs as marketing costs because that’s what they were, promotional deals to attract customers, a spokesman for Lynch said today.

While that practice would be “highly unusual” and “could be construed as misleading,” it would be difficult to call it a breach of accounting rules with the information available, said Larry Kanter, a Dallas-based forensic accountant who teaches a forensic accounting and financial fraud course at the Southern Methodist University’s Cox School of Business.

“That’s what makes this so difficult,” he said in an interview. “These are highly complex transactions and you’ve got to get all the facts to be able to make the determination on the proper way to account for it.”

‘Red Flags’

Deloitte LLC said this week that it didn’t find any evidence of improper accounting methods or misrepresentations when it last looked at Autonomy’s finances before Hewlett- Packard bought the software company. Deloitte, which said it wasn’t employed to do due diligence on the deal, last audited Autonomy’s finances for the year ended Dec. 31, 2010.

“The board relied on audited financials -- audited by Deloitte -- not Brand X accounting firm but Deloitte,” Hewlett- Packard Chief Executive Officer Meg Whitman has said.

Analysts had voiced their concerns about Autonomy’s growth rate in the years before Hewlett-Packard’s acquisition. Paul Morland, now an analyst at Peel Hunt, included Autonomy in a June 2009 note for Astaire Securities called “Accounting Red Flags.”

The rate at which the company was converting profit into cash, a sign of “true profit” was particularly low, Morland said at the time. Autonomy said that this was due to high growth rates, according to the note.

Sales Push

Autonomy also had a low rate of converting sales into cash, Morland said. A potential explanation for this phenomenon could be a situation where revenue is recognized twice and cash is collected once, which might happen with cash from an acquired company, or if businesses accelerate revenue recognition from acquired companies, he said at the time.

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. (KO) 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.

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.

Asked if Autonomy put pressure on partners including investment banks handling business for the software company to buy software, Lynch said while he’d “encourage anyone” to buy his software, it was never a condition of employment.

“We would certainly put pressure on anyone to buy more,” Lynch said.

To contact the reporter on this story: Amy Thomson in London at athomson6@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at thiel1@bloomberg.net

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