HP Hits Back After Angry Letter From Autonomy Boss

The acrimonious fallout from Hewlett-Packard's disastrous takeover of Autonomy has continued with a war of words erupting between the British tech firm's founder and the US company.

After Mike Lynch fired off an angry letter to HP's board demanding "immediate explanations" for its "highly damaging allegations" that his company inflated its revenue-and-profit figures before HP bought it, the Silicon Valley company hit back on Tuesday night, effectively saying it would see Lynch in court.

"The matter is in the hands of the authorities, including the UK Serious Fraud Office, the US Securities and Exchange Commission's enforcement division and the US department of justice, and we will defer to them as to how they wish to engage with Dr Lynch. In addition, HP will take legal action against the parties involved at the appropriate time.

"While Dr Lynch is eager for a debate, we believe the legal process is the correct method in which to bring out the facts and take action on behalf of our shareholders. In that setting, we look forward to hearing Dr Lynch and other former Autonomy employees answer questions under penalty of perjury."

Lynch, who left HP in May only seven months after the US firm bought his software company for $10.1bn (£6.3bn), said in the letter that HP needs to explain how it arrived at its figure for the writedown on the purchase. He asked: "Can HP really state that no part of the $5bn writedown was, or should be, attributed to HP's operational and financial mismanagement of Autonomy since the acquisition?"

HP last week announced that it was writing off a total of $8bn in the value of Autonomy and shareholder value impairment, as it released its quarterly figures. Meg Whitman, the chief executive, said that there had been "outright misrepresentation" in Autonomy's pre-takeover accounts – although she stopped short of calling it fraud. She said it had gone on for at least eight quarters before the takeover.

Almost all Autonomy's former senior managers have left the company since the takeover was completed in October 2011. Whitman said that a whistleblower only came forward to allege improprieties in how Autonomy booked revenues after the departure of Lynch and others.

Whitman and the HP board face huge problems in explaining how they approved the purchase of Autonomy at a 58% premium to its stock market value when they made the offer. Although Léo Apotheker – since ousted – was then the chief executive, Whitman was one of the directors who approved the purchase.

It is the third big writedown in less than a year for HP, following purchases of EDS and Palm, where it has spent a total of $26bn and written off $19bn in all.

HP's woes were magnified on Monday as a number of investors filed a class action lawsuit in San Francisco, claiming that HP concealed accounting manipulation at Autonomy between the announcement of the deal last summer and last week, when it took the writedown against the deal.

"At the time Hewlett-Packard agreed in principle to acquire Autonomy, defendants were looking to unwind the deal in light of the accounting irregularities that plagued Autonomy's financial statements," the lawsuit stated. HP said the alleged manipulation of financial performance at Autonomy had not been spotted at the time of the deal, and was revealed only later by a whistleblower. It said $5bn of the writedown was related to the alleged accounting improprieties.

But Lynch has hit back with a number of pointed questions, which HP has not so far answered. He said that "a significant amount of revenue" would have to be involved for a $5bn writedown to be necessary.

He says: "Please explain how such issues could possibly have gone undetected during the extensive acquisition due diligence process and HP's financial oversight of Autonomy for a year from acquisition until October 2012 (a period during which all of the Autonomy finance reported to HP's CFO, Cathie Lesjak)."

HP suggested last week that Autonomy had inflated its revenues by selling hardware at break-even or a loss in order to boost software revenues – to which Lynch responds: "Please confirm that Ms Whitman and other HP senior management were aware of Autonomy's hardware sales before 2012. Did Autonomy, as part of HP, continue to sell third-party hardware of materially similar value after acquisition? Was this accounted for by HP and was this reported in the Autonomy segment of their accounts?"

Whitman said in a phone call last week that HP had not spotted the alleged improprieties ahead of the takeover: "We believe from what we have seen there were internal efforts by certain individuals to conceal these from the marketplace."

Powered by Guardian.co.ukThis article was written by Charles Arthur and Rupert Neate, for The Guardian on Wednesday 28th November 2012 01.28 Europe/London

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