Autonomy's $11bn (£6.6bn) sale to Hewlett-Packard faces further scrutiny after documents cast doubt over the structure of some transactions conducted by the British software firm before its takeover.
New evidence has come to light which, according to HP, raises questions over some multimillion-dollar deals with middlemen – resellers of Autonomy software – who bought the Autonomy products on credit in order to sell them on to a named end-user. The documents refer to reselling deals with three blue-chip companies: food group Kraft, drugs company Eli Lilly, and accountancy firm KPMG.
The news comes as a San Francisco court prepares to rule on Monday whether a group of HP shareholders can settle a dispute with the US tech firm over the Autonomy transaction.
Autonomy's founder Mike Lynch and HP boss Meg Whitman have been at loggerheads since California-based HP announced in November 2012 that it was writing down the value of Autonomy on its books by $5bn. HP said it had uncovered "serious accounting improprieties, disclosure failures and outright misrepresentations" at Autonomy.
Lynch and his team deny all allegations of wrongdoing, attributing much of the problem to differences between British and American accounting standards. They blame bad management by HP.
"This was the first time you had a fundamental software technology business go worldwide out of the UK and they have destroyed it," Lynch told the Guardian last week. "The star example for UK software technology at world class levels has now been irreparably damaged."
One of the documents seen by the Guardian is a letter sent by Autonomy's then finance director during a confidential 2011 review of Autonomy's accounting methods by the Financial Reporting Council (FRC), which polices what UK firms tell shareholders about their performance.
HP, which bought Autonomy in October 2011, has queried over $200m of the $1bn in revenues Autonomy reported in 2010. HP attributes $100m of the sum to a string of big deals with various resellers. A source with knowledge of the matter said HP believed "dozens" of Autonomy's contracts with resellers from January 2009 onwards were questionable. Autonomy says it signed 15,000 deals in the period.
Lynch said that Autonomy's auditor, Deloitte, was aware of every transaction that has been questioned, and approved Autonomy's accounting methods. The Guardian has seen the relevant Deloitte audit notes. A spokesperson for the auditor said: "Deloitte conducted its audit work in full compliance with regulation and professional standards."
The deals centred around contracts with a reseller to buy software on credit and with little or no money changing hands up front. The contract would name an end user, such as a bank or government agency, to whom the reseller intended to sell the software. Under UK accounting standards, Autonomy could count such promises as real revenues as long as the reseller signed a legally binding agreement stopping it from returning the software if it couldn't find a buyer.
But the documents suggest the resellers were not always able to sell the software to the named end customer. In some cases their purchase from Autonomy was cancelled, and at least one reseller received fees from Lynch's company in compensation. On 30 September 2009, the last day of a financial quarter, a reseller called Capax placed a $4m order with Autonomy for software it intended to sell to Kraft, which owns the chocolate maker Cadbury. Capax made a $400,000 downpayment on the deal. But in the following quarter Kraft arranged to buy the software directly from Autonomy. Autonomy subsequently cancelled its sale to Capax, and paid it a $400,000 one-off feein compensation. The $400,000 downpayment Capax had made for the Kraft deal was carried over to a new deal, for software Capax intended to sell to Eli Lilly.
Details of the transaction emerged from a letter sent on 8 June 2011 from Autonomy's then finance director, Sushovan Hussain, in response to questions from the Financial Reporting Review Panel, which acts for the FRC. In August, the panel said it "does not intend to pursue any of the above matters further". Following on from HP's concerns, The regulator is now rechecking Autonomy's books, having opened a full inquiry in February 2013. The FRC declined to comment.
The correspondence shows that on 31 December 2009, the last day of Autonomy's financial year, Capax signed a $6m purchase order for software for Eli Lilly. But the following year, in June 2010, with the money still outstanding from Capax, the pharmaceutical group apparently decided to deal directly with Autonomy, again bypassing the reseller. Hussain's letter says Capax was made a party to the contract, invoiced Eli Lilly for the software, and remained liable to pay Autonomy for it.
A second document highlights a deal with a British reseller, Tikit, which is now owned by BT but was an independent company at the time. On 31 December 2010, Tikit signed for $6m of Autonomy's WorkSite software, which it hoped to sell to KPMG. But the document, a letter dated 31 December and signed by Autonomy and Tikit executives, appears to transfer some financial risk back to Autonomy. It promises nearly $1m of work to Tikit should the company not complete its KPMG deal by 30 March 2011. The letter states: "Tikit shall be appointed as the second line support and maintenance provider to KPMG under the existing maintenance agreement between KPMG and Interwoven [an Autonomy company] for three quarters from 1 January 2011 for a fee of up to £320,000 per quarter."
A spokesman for Lynch confirmed Tikit was eventually contracted to work with Autonomy for KPMG, and paid for the software. He added that software customers often sign deals at the end of a quarter to negotiate the best price from the supplier, and that most software vendors operate on a credit basis.
Lynch said: "This is another example of selective disclosure by HP. They have partially leaked details around a few deals, out of over ten thousand that took place, which were all reviewed and cleared by the auditors, including any fees, and recorded as such at the time. They were noted as extremely rare cases and the cash was received for all of them. In short they were handled correctly. HP needs to explain where the $5bn write-off came from, not run a smear campaign of selective facts and spin."
"They want to destroy us through spin before the facts are tabled. If this was a multibillion-dollar fraud why were people paying us? There would have to be an enormous cash hole and there isn't. If you have got cash coming in year after year, that's a sustainable business."
HP says it signed 150 new customers for Autonomy in 2013, and has increased headcount at the division by 25% since the acquisition.
"We were able to bring in world class management like Robert Youngjohns to lead the organization, we have seen a significant turnaround in all aspects of the business including employee morale, customer satisfaction, and product innovation."
A source with knowledge of the matter said HP and its advisers did not have access to the Deloitte audits or work papers during the due diligence process. But Lynch's spokesman said HP's due diligence team was entitled to inspect all documents, and if there were documents they did not see, it was only because they were not asked for.
The deal to acquire Autonomy was conceived by Leo Apotheker, the then chief executive of HP, who planned to sell its personal computer division in order to concentrate on servers and software, a strategy in which the British firm was to play a leading role. But Apotheker was ousted after investors took fright and HP shares plummeted.
The case has triggered shareholder lawsuits, one of which is due to be settled in California on Monday. Hussain is hoping to block the settlement.
Regulators have launched inquiries on both sides of the Atlantic, with FBI agents assigned to investigate in the United States. The Serious Fraud Office announced a preliminary criminal investigation in March 2013.
Lynch, whose fortune was boosted by an estimated £500m when HP acquired his company, has now expressed regret that the deal ever took place. It is understood he hopes eventually to sue HP for damages. "Autonomy was set up to change the software industry, it wasn't just another application. Leo's vision was to change the world as well. What is sad now is that dream will never come true.
"The thing about a technology acquisition is you value it on what you can do with the technology. I think Leo's plan to change HP was a great one and in that light I don't think they overpaid. If they were buying it to bolt it on I wouldn't have bought the company at that multiple."
