HP says it overpaid by $5bn for Autonomy

Hewlett-Packard overpaid for Autonomy by at least $5bn after its founder Mike Lynch led a "systematic" effort to "artificially inflate" his company's revenues, according to a legal filing in which the US technology conglomerate set out its full case against the British entrepreneur for the first time.

HP is suing Mr Lynch and Sushovan Hussain, Autonomy's former chief financial officer, alleging fraud while seeking damages of $5.1bn in one of the largest civil cases brought in the UK against British nationals. Both Mr Lynch and Mr Hussain deny the claims.

In 2012, HP said it would take an $8.8.bn writedown of its disastrous $11.1bn acquisition of Autonomy, $5.5bn of which was due to alleged "accounting misrepresentations".

In a claim filed at the High Court in London, HP alleged that the men led efforts over two-and-a-half years to engage in "improper transactions and accounting practices".

The company did not say this activity would have dissuaded it from buying Autonomy, but said it had an inaccurate picture of UK software group's financial health when weighing up the acquisition.

The US company alleged that Autonomy's revenues were about 25 per cent lower than it reported in 2009, 38 per cent lower in 2010 and 36 per cent lower in 2011.

HP also said that its "conservative" projections of Autonomy's future growth would have been far less.

According to the filing, the US company calculated losses caused by the Autonomy acquisition by working out the difference between "the price that [HP] actually paid for Autonomy (ie approx US $11.1bn) and the lower price that [HP] would have paid in order to acquire Autonomy, had it known the true position (this being a price which the selling shareholders in Autonomy would certainly have accepted or which they would have been likely to accept had they, too, known the true position).

"The quantification of the loss will be a matter of expert evidence in due course, but it is estimated to be at least £3.2bn (equivalent to approx $5bn)."

Mr Lynch told the Financial Times: "HP's claim is finally laid bare for what it is - a desperate search for a scapegoat for its own errors and incompetence. The contents of the claim are a simple rehash of previous leaks and insinuations that add up to one long disagreement over accounting treatments, and have nothing to do with fraud."

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The opposing parties have engaged in a long war of words that broke out when Meg Whitman, HP chief executive, announced the writedown three years ago.

Among the transactions at the heart of HP's case are $200m of hardware sales made between 2009 and 2011. It said the lossmaking deals were used to make up shortfalls in Autonomy's bottom line.

HP alleged that Autonomy aggressively pursued such deals, then misled its audit committee and the markets as to their nature.

In one incident in 2009, Mr Lynch allegedly told an Autonomy salesman he would buy him a Porsche if he could sell $10m of pure hardware by the end of third quarter. Later, Mr Hussain allegedly approved a six-figure bonus for the salesman.

Mr Lynch said he never bought the salesman a Porsche. "In the software industry, salespeople are often incentivised with bonuses and 5 per cent is a normal level," he said.

The US group also questioned multiple transactions that Autonomy made to resellers, intermediaries who hoped to sell its software on to end customers. HP alleged that Autonomy made many sales to these middlemen on the last day of a financial quarter, helping to artificially push up its reported revenues.

HP claimed it was "agreed and/or understood" the reseller was not "on risk" for the transaction. It alleged that this meant there was a gentleman's agreement that the middleman would not actually pay Autonomy at all.

HP alleged that on some occasions, these reseller transactions were simply cancelled. At other times, it said Autonomy later bought products and services from a reseller at a greater cost than the original deal, meaning the middleman made an overall profit.

Mr Lynch said: "It is normal practice in the software industry for deals to be done at the end of the quarter when customers get the best deals.

"The [resellers] were on risk as is evidenced in the paperwork, the fact was also confirmed by Deloitte [Autonomy's auditors] and communicated to the audit committee. HP puts forward no evidence to counter this."

HP has previously said it is in discussions with Deloitte and "continues to exchange information in accordance with the pre-action protocol process in the UK".

Deloitte argued that any claim against it would be "utterly without merit".

In the legal filing, HP also contended that Autonomy tended to work with just five resellers, saying top executives at these middlemen groups included family members of Autonomy employees or were former Autonomy staff themselves.

"Many people who were trained at Autonomy have gone out to fill senior positions in the software industry. We don't understand why this is relevant," said Mr Lynch.

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