HP Sued for $1 Billion Over Troubled Autonomy Acquisition

By Jeffrey Burt  |  Posted 2013-05-09

HP Sued for $1 Billion Over Troubled Autonomy Acquisition

Hewlett-Packard executives reportedly ignored warnings before it bought software maker Autonomy for $11.3 billion that the company's financial numbers were exaggerated and tried to get out of the deal before it closed, according to a $1 billion lawsuit filed by HP shareholders earlier this month.

The lawsuit, filed May 3 in U.S. District Court in San Francisco, accuses current and former HP executives of failing to do the needed due diligence ahead of the deal for a company that the shareholders called "a polluted and vastly overvalued asset."

The result of the alleged negligence by the executives and directors was the $8.8 billion writedown on the deal HP announced in November 2012 due to what HP officials said were accounting irregularities by Autonomy executives in the months leading up to the deal. According to the lawsuit, the resulting drop in HP's stock price effectively wiped billions of dollars from the company's market value.

The lawsuit also claims that HP, desperate to get in on the burgeoning big data software market, vastly overpaid for Autonomy software that was "an outdated product that was not user-friendly."

Among those named as defendants are CEO Meg Whitman (who was on the company's board of directors before taking the top job), former CEO Leo Apotheker, former board Chairman Ray Lane (who resigned as chairman last month but remains on the board) and Mike Lynch (who was Autonomy's founder and CEO at the time of the deal). Lynch has disputed HP's accusations that he or any other Autonomy executives doctored financial records before the deal, and has said it was HP's mishandling of the British company afterward that created problems.

Other defendants in the lawsuit, filed on behalf of PGGM Vermogensbeheer—a Dutch pension fund—and other shareholders, include Barclays Capital and Perella Weinberg Partners, which HP hired to look into Autonomy's business.

HP began negotiating the Autonomy deal in 2010, and Apotheker pushed the deal after he took over as part of his efforts to build HP's enterprise software capabilities. Autonomy's software enables businesses to search for and retrieve information in databases and other repositories across computer networks. Whitman was on the board of directors at the time the board approved the acquisition, which closed in 2011.

HP's announcement of the $8.8 billion charge shook a company already struggling after several years of executive instability—Whitman was HP's third CEO in less than two years—the decline of sales in the global PC market and other issues. It also came only a few months after HP announced an $8 billion charge in connection with its $13.9 billion acquisition in 2008 of services vendor EDS Systems.

HP Sued for $1 Billion Over Troubled Autonomy Acquisition

According to a report in The Guardian, Apotheker was influenced to pursue the deal by "self-interested auditors, Wall Street bankers and other investment advisers who facilitated HP's severely reckless pursuit of Autonomy in exchange for nearly $100m in fees." The lawsuit also accuses Lynch of hoping to get out from under Autonomy before any accounting discrepancies were discovered and the company failed.

Shareholders in the lawsuit also claim that HP executives and directors—including Whitman—knew before the deal closed about Autonomy's accounting issues from whistleblowers and reports by journalists and analysts. Still, HP's due diligence in vetting Autonomy's financial books lasted only three weeks, the shareholders say in the lawsuit.

At the same time—"unbeknownst to investors," according to the court documents—HP was trying to back out of the deal before the Oct. 3, 2011, deadline. However, Lane was told by advisers from Barclay and Perella that because HP's board knew of allegations against Autonomy of financial irregularities before making the offer, U.K. regulators would not let HP get out of the deal.

The court documents also outline several ways Autonomy executives allegedly made the company's financial numbers look better than they really were.

The lawsuit was not the first one filed against HP in connection with the Autonomy deal; a week after the tech giant announced the $8.8 billion writedown, another shareholder sued HP.

 Despite the problems and bad publicity caused by the Autonomy deal, Whitman in April said in a news conference that Autonomy is an important part of HP's future and that—despite speculation—she had no intention of shutting down or selling off Autonomy or any other part of HP's business.

"We remain committed to Autonomy; we remain committed to the brand, to Cambridge, to the U.K.," she said. "It is an almost magical technology. … It plays into a big shift in the market, the area of big data, which HP should be in."

Rocket Fuel