It is not often that one sees buyer’s remorse blamed on the fraudulent accounting policies of an acquired company. And there is good reason for that. If in fact there was fraud involved in the sale of Autonomy to H-P (and Autonomy’s former CEO has vigorously denied H-P’s allegations), there is still a lot of potential downside to H-P from making the claims.
Essentially, to avoid further problems or costs, H-P will have to establish three main points.
The most important one is that Autonomy committed what H-P called “serious accounting improprieties” and that, in the words of H-P CEO Meg Whitman, they were “designed to be hidden.” Or, in short, Autonomy committed fraud.
Fraud is generally not easy to prove. And because this deal was with a U.K.-listed company, the acquisition was done in accordance with U.K. practices and the Offer agreement is a simple 11-page letter agreement.
The paperwork didn’t include specific representations and warranties found in U.S.-style documents, representations and warranties that H-P might otherwise could have used as a basis for saying it was misled. Rather, to win a civil fraud case, H-P would have to prove that management of Autonomy intentionally misrepresented material facts to it.
It likely wouldn’t be enough to show that it wasn’t given every possible document; H-P would need to show that it asked the specific questions calling for the information H-P claims was hidden from it. And that the answers it got were at least misleading.
To recover on allegations, H-P would probably need to litigate the issue in the U.K. courts. And the U.K. generally follows a “loser pays” rule for litigation expenses. So if H-P fails to establish the fraud and its right to recover damages, H-P could face steep legal bills and spend even more H-P shareholders’ money.
Second, H-P has the responsibility for its own financial statements, which include Autonomy since the acquisition. H-P could be subject to an inquiry from regulators or even litigation from its shareholders on the issue of whether, if there was accounting fraud at Autonomy, that fraud infected H-P’s financial statements. In other words, if transactions were being improperly recorded prior to the closing, did the improper accounting entries stop effective with the closing? Or at least was there no material impact of them on H-P’s financial statements?
H-P’s general counsel said in an interview that the acquisition has caused no problems with H-P financial statements since the deal closed and that there is no material weakness in its control processes in connection with its accounting for Autonomy.
Still, the fraud allegations could raise questions. For example, if Autonomy’s alleged fraud caused revenue to be improperly accelerated, did H-P book that revenue at the proper time when it owned Autonomy?
And those kinds of questions lead to a third major one: if there was such a massive fraud that diluted the value of Autonomy by almost one half, how come it took so long for H-P to figure this mess out?
The Autonomy acquisition was completed in October of last year. Lynch left H-P in May. H-P says after that a whistleblower surfaced and the fraud was exposed. Lynch in an interview Tuesday called the allegations “completely and utterly wrong” and said “we reject them completely.” He said H-P had broader business problems, including value H-P destroyed at Autonomy, and that H-P is now “trying to cover it up with this big write off.”
If there was such a massive fraud as H-P alleges and the creative bookkeeping just stopped after the closing, why did it take six months before H-P realized something was very wrong? Was it asking the right questions? H-P might argue that before Lynch left Autonomy had a lot of independence, and it is not reasonable to expect H-P to discover every problem in that six-month period. But with such massive changes in the accounting, wouldn’t one expect some alarm bells to be going off?
These issues are like a three-legged stool for H-P. To win a case, it has to establish the fraud, and then, to avoid problems with its own shareholders or regulators, it needs to ensure that the bad accounting didn’t affect H-P financials and establish that it didn’t miss any red flags in ferreting out the alleged fraud. If any of the legs of that stool come up short, H-P could find itself toppling deeper into a morass. And that is one of the reasons why you don’t see many acquirers making these kinds of allegations even if they feel aggrieved.
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