HP’s big problem isn’t Autonomy: It’s HP

It may seem crazy to talk about $8.8 billion as a sideshow, but in the case of the alleged fraud perpetrated against Hewlett-Packard by Autonomy, that’s exactly what it is. No matter how this plays out in court, which is where it’s certainly headed, HP will be the same troubled company.

Like the red, swollen surface of an abscess that covers a pocket of infectious pus (apologies for the metaphor), the Autonomy debacle is a symptom of underlying rot in both HP and Wall Street — more precisely, the nexus of accounting firms and investment banks that call the plays when technology firms engage in M&A.

[ At the time, HP’s Autonomy purchase looked smart to InfoWorld’s Eric Knorr. | Bill Snyder on why HP CEO Meg Whitman may be steering HP into the rocks. | Get a digest of the key stories each day in the InfoWorld Daily newsletter. ]

HP: A crisis on every front Let’s make one thing clear. I’ve been critical of HP CEO Meg Whitman in the past, but this one isn’t on her. It’s the last remnant (one hopes) of the miserable reign of her fired predecessor, Léo Apotheker, truly the gift that keeps on giving.

Whitman has a huge job ahead of her, not the least of which is making sure that Autonomy continues to function within HP and that the technology for which HP paid more than $10 billion in 2011 is not wasted. Whitman’s spokesman, Michael Thacker agrees, telling me, “We are 100 percent committed to Autonomy; we’re going full-steam ahead with our plans for it.”

Autonomy aside, consider the mess Whitman inherited that has nothing to do with Autonomy:

• HP’s cash cow, the market for printers and ink, is shrinking.
• The PC market is declining as the old desktop-centric computing model takes second place to mobile hardware and applications.
• HP’s mobile strategy has been entirely unclear since it killed WebOS.
• The services business that is supposed to be the other main revenue driver is in questionable shape.

Autonomy: World’s most expensive turkey? When I said Autonomy is a sideshow, I meant the accounting issue. The Autonomy unit itself is not. It was meant by Apotheker to be a cornerstone of a software strategy, and it’s unclear if HP can make that strategy work. Indeed, there’s an argument to be made that Apotheker may have purchased the world’s most expensive turkey.

Before HP bought it, Autonomy was facing challenges after years of fast growth but poor customer relations, says Leslie Owens, an analyst at Forrester Research. “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,” she said. “Customers complained, but the promise of managing all their information and making better decisions was so attractive. So they bought more.”

Soon after the HP acquisition 18 months ago, Owens said Autonomy announced a new version of its core product: “We asked for a demo; we’re still waiting.” In a blog post at the time she said, “But far from the integrated and complete EIM [enterprise information management] solution that HP laid out for investors, Autonomy represents a pile of technology that HP will need to make sense of.” She also noted that Autonomy’s IDOL (Intelligent Data Operating Layer) technology “is stagnant. There hasn’t been a major release of IDOL in over five years.”

Trip Chowdhry, principal analyst of Global Equities Research, is even harsher, saying when HP purchased Autonomy, “it was buying old, obsolete technology at an exorbitant price.”

Autonomy to analysts: Shut up or else Owens wasn’t the only analyst who was stonewalled. A damning account in the Guardian newspaper recounts how Autonomy tried to punish financial and technology analysts who raised questions about the performance of the company and its products.

Alan Pelz-Sharpe, an analyst at the 451 Group, was banned from speaking to company staff. He told the Guardian, “I was essentially blacklisted by them, so in theory nobody there could talk to me. If I wrote anything critical, I would have a threatening note come back saying my report was riddled with inaccuracies and there was no way it could go to press.”

Michael Lynch, the former CEO of Autonomy, disputes the charges against him, saying in a written statement: “Autonomy’s finances, during its years as a public company and including the time period in question, were handled in accordance with applicable regulations and accounting practices. … I utterly reject all allegations of impropriety.” In any case, HP says it fired Lynch, and much of the Autonomy executive team reportedly went with him.

Without going into a lot of detail, I should also note that some analysts wonder how several hundred millions of dollars in alleged accounting errors (deliberate or not) translate into an $8.8 billion write-down. For its part, HP says the accounting errors led the company to pay far too much for Autonomy, accounting for $5 billion of the charge. Additionally, the issue and subsequent loss of goodwill may cause HP’s stock to lose even more value, accounting for the remaining $3.8 billion.

Lynch has told several reporters that he believes the underlying issue may be differences in U.S. and European accounting rules that somehow HP, its bankers, and its accounting firm didn’t think to reconcile. I can’t say if the argument holds water, but I know that the big accounting firms auditing companies like Autonomy are prone to terrible mistakes and misrepresentations. Remember — before Enron blew up, Arthur Andersen, its Big Five accounting firm, gave it a clean bill of health. The explosion totaled Andersen, which is why we now talk about the Big Four.

Good deal or stupid deal, Wall Street wins As the Guardian points out, both UBS and Goldman Sachs, the investment banks that advised HP on the Autonomy purchase, had access to damning information about it but never raised a red flag. Like the accounting firms, the big investment banks have a vested interest in making these blockbuster deals happen, so it’s not surprising that they cover their eyes and hold their noses when a bad smell drifts toward them.

This whole business really stinks, and there’s lot of blame to go around.

As far back as the lunatic acquisition of Compaq Computer by failed CEO and failed Senatorial candidate Carly Fiorina, HP’s record on major acquisitions is terrible. The shareholder value of the company has been decimated, and tens of thousands of employees (I’m not exaggerating) have lost their jobs.

If the company is serious about cleaning up this mess, at the very least the current board members who were there when Autonomy was purchased need to go. As to Whitman, “give her the benefit of the doubt,” says Chowdhry. “But a culture that punishes innovation and rewards politics has got to change.”

I welcome your comments, tips, and suggestions. Post them here (Add a comment) so that all our readers can share them, or reach me at bill@billsnyder.biz. Follow me on Twitter at BSnyderSF.

This article, “HP’s big problem isn’t Autonomy: It’s HP,” was originally published by InfoWorld.com. Read more of Bill Snyder’s Tech’s Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.