Autonomy, the leading British technology firm whose former management is accused of inflating its value, sold $23m of software to a small Washington reseller in the year to December 2009. In February 2010, as some of the money began to fall due, Autonomy bought the company.
MicroLink was a security-cleared IT contractor working with US government departments, employing 140 people at offices in Virginia, on the outskirts of Washington DC. On 9 February 2010, with around $7m in payments overdue by more than a month, according to documents seen by the Guardian, Autonomy announced the acquisition of MicroLink for $55m.
Mike Lynch, the Cambridge scientist who founded Autonomy, his finance director Sushovan Hussain, and the group's auditor Deloitte have been threatened with legal action by Hewlett-Packard, which acquired Autonomy for $11bn in 2011. A year later, HP shocked investors by marking down the value of the British group by $5bn, blaming "accounting improprieties".
The transactions with MicroLink are understood to be among those questioned by HP. A spokeswoman for the Californian computing group said: "As HP has consistently stated, Autonomy senior management participated in deals with value-added resellers designed either to improperly accelerate revenue recognition or to manufacture revenue where none existed, all with the end goal of making Autonomy appear to be growing at a faster rate than was actually the case."
Autonomy's founder and former managers deny any wrongdoing, attributing much of the problem to differences between UK and US accounting standards, and blaming the write-down on mismanagement of Autonomy by HP.
A spokesman for the former managers dismissed as false any suggestions the purchase of MicroLink was designed to wipe out its debt to the British firm. In fact, they claim MicroLink helped secure $150m in US government sales over the following years.
The spokesman said: "Revenue is revenue if it translates into cash, and the cash is all there. HP's own accounts confirm it. As is normal for a business doing 15,000 transactions during that time, sometimes a customer didn't pay all their bills, but it didn't happen often, and it was covered by provisions in the accounts, meaning there was no impact on the accounts or the growth rate."
The Guardian has seen papers which show Deloitte was aware of the transactions and flagged them to Autonomy's audit committee. A spokesperson for the auditor said: "Deloitte conducted its audit work in full compliance with regulation and professional standards."
When MicroLink became part of Autonomy, nearly $12m of the software it had not yet paid for remained unsold. Following the takeover, $11.5m of the $23m debt was deemed not owing, in calculations approved by Deloitte. During 2010, the Guardian has seen evidence that Autonomy retrieved $7.7m in cash from MicroLink – less than half the original debt.
By the second quarter of 2010, $3.8m remained not accounted for. It was however covered by a provision of $5m in Autonomy's accounts. The provision, essentially a cushion against invoices that might not be collected, was approved by Deloitte. Former management say the sum was not material when compared to the British firm's $870m in revenues for 2010.
When announcing the purchase, Autonomy did not explain in its financial statements that it was buying a reseller which owed tens of millions of dollars. However, the sum owed appears to have been significant for both parties.
MicroLink's net annual revenues – the margin it made on top of the tens of millions of software it re-sold – in 2008 were $22m, and its projected revenues for 2009 were $25m, according to papers Lynch showed to his board before the purchase. So the $23m MicroLink owed Autonomy was the equivalent of a year's revenues. For Autonomy, the debt equalled 10% of all money outstanding from its various business partners as of December 2009. Microlink's previous owners, David Truitt and Timothy Wharton, declined to comment.
The price paid for the reseller was verified by Autonomy's auditors and subject to a fair value test by an independent consultancy. Of the $11.5m considered no longer owing, $6.9m was for Autonomy products which MicroLink had acquired to include in its own software, according to Autonomy's former management. Once the British firm owned MicroLink, that product was registered as an asset.
A further $4.6m was Autonomy software which MicroLink collected payment for, from its customers, but had not yet passed to the British company by the time of the takeover in February 2010.
The decision to buy MicroLink, taken in December 2009, was driven by Autonomy's concern that the US government was increasingly worried about dealing with a foreign owned company, albeit one based in Cambridge rather than Beijing. At the time, Autonomy's US business, which accounted for half of its global headcount, had sensitive contracts with the departments of defence and homeland security.
An internal email dated September 2009, seen by the Guardian, shows Lynch was advised that in order to continue working for federal agencies, the US division would need to be run at arm's length. UK managers would only be able visit or make phone calls by prior arrangement, and a separate management board would have to be installed.
Autonomy decided it would be more practical to purchase MicroLink, a company it had done business with since 2006 and which already had 86 security cleared staff.
"Autonomy acquired MicroLink so it could keep supplying software to sensitive branches of the US federal government," a spokesman for Autonomy's former managers said. "MicroLink's most important assets were its security cleared personnel and a secure facility. Without it, changes to the US government rules meant that, as a foreign owned company, Autonomy would have had to withdraw from this significant market."
Details of MicroLink's debt have emerged from a letter sent by Autonomy to the Financial Reporting Review Panel, which polices how listed companies communicate with their shareholders. The panel conducted a review of Autonomy in 2011 but took no further action. Following HP's allegations, the panel opened a full inquiry in 2013, which is ongoing. The Guardian has also seen Deloitte audit notes and emails.
guardian.co.uk © Guardian News and Media Limited 2010