From the monthly archives:

November 2012

 To follow up the post last week, I spent much of Sunday calmly and dispassionately looking through the facts and various commentaries surrounding the Hp and Autonomy dispute and thinking through two questions—

  • What is really going on here?
  • Are there any IP issues, where I can claim some insight and which are worthwhile commenting on?

I decided to stay largely out of the who’s right and who’s wrong debate. Will Hp successfully transition into something of worth to its shareholders? I don’t know enough to comment never mind give an absolute statement like Nick White does to my original post below—I might be opinionated Nick but I’m not so bold as to call a $130bn turnover company a train wreck.

Did Autonomy manipulate its results? That’s a question of accounting and regulatory fact—though the apparent involvement of several leading financial advisory firms in both audit and diligence reviews would suggest that however Autonomy was accounting for revenues and profits, it would be surprising if Hp did not go into the acquisition having diligenced Autonomy with some rigour and therefore with open eyes. What did the board paper say? That would be an interesting disclosure Hp?

I believe that the key IP, or to be more accurate intangible questions to ask, are those posed in Friday’s post.  But I thought I might also try to offer Hp some free IP strategy advice.

The intangible value of Autonomy to Hp

In all of the reporting, the numbers paid and written off get different levels of reporting and it’s hard to work out what is and really was what. The facts appear to be these:

What did Hp actually pay for Autonomy? Hp paid a 64% premium to its market value on the London Stock Exchange in a deal announced on 19th August 2011, valuing Autonomy at £7bn, or $11.7bn at that time. The various reports seem to give different dollar valuations, anything from $10.1 to $12bn—but this BBC report simultaneous with the transaction being announced can be taken as accurate. We should therefore take $11.7bn as the accurate number.

What did Hp write down? On Tuesday 20th November 2012, Hp wrote down its own total value by $8.8bn, all of which it attributed to Autonomy. That took Hp’s $6.8bn profit for the period down a net loss.

Why did Hp pay such a large premium for Autonomy in the first place? I can only go back to Leo Apotheker’s statements at the time

“Autonomy represents an opportunity for HP to accelerate our vision to . . . lead a large and growing space, which is enterprise information management. If we execute this deal it will position HP as a large and growing leader in the space”.

Ignore the numbers paid, I suggest, and look at the premium. 64% above its market capitalization is a large number to pay. But then new Hp, with Autonomy, was going down the enterprise route, getting rid of its consumer focused PC and smartphone ambitions having decided, apparently, that it could not compete. Autonomy’s unstructured search capability was and still is a good and highly strategic fit with that plan and Hp paid a giant slice of its then cash reserves (over 85% by my reckoning) which at the time stood at just over $13bn. Notwithstanding the number paid, Hp was acquiring something without which it could not compete with IBM as new Hp. Autonomy was and is still recognized as the worlds’ leading unstructured search engine.

What has changed? To justify such an extraordinarily large write off, the only conclusion that can be safely reached is that the underlying reason for Hp’s purchase no longer applies. In other words, Autonomy is no longer central to what Hp is seeking to achieve. Try a football analogy, its like Liverpool paying an extravagant £35m for Andy Carroll in January 2010 and then finding he can’t fit into your playing system under the new guy only 18 months later- Liverpool can only try to sell him at a loss. In his case 1/3 of his original price—that’s actually a really good parallel now I think about it.

 Are the claims of impropriety accurate? I’m not qualified to answer and neither is the opinionated Nick White. But I’d assume that Hp would have had access to full diligence from KPMG and Apotheker today described the diligence as “meticulous”. I’m sure it was. But it misses somewhat the point—and that is that Hp was not buying Autonomy for then Autonomy, it was buying it as Autonomy was central to new Hp’s future—an impulse buy if you like. When you really want something, do you really question its price? Think of Apotheker and the Hp board, little changed from then to now, all buying iPads, price is less of a factor than how it feels to own it

What is Autonomy now worth to Hp? It’s a safe bet that the answer is a lot less than it was even before the announcement of last Tuesday. At that point, by my calculation, they still valued it at $2.9bn ($11.7-8.8). But what damage has been caused to Hp and to its own product by these claims (and did anybody think about that factor in the PR strategy).  What do you now think of Autonomy–would you use it? Value destruction by Hp’s own hand. I’ll go back again and say that, as an IP strategy house, any structured and sensible IP diligence on Autonomy would have shouted that this was not a company that relied on patents—it had gone the sensible and credible IP strategy route of protection by trade secrecy and confidentiality (ie, not telling anyone) and that had to mean that the Autonomy core team were essential to its long term success. No deal without a long term lock in—quite simple.   

And for the Autonomy team and Brand Cambridge. This is not good news for either. In Mr Lynch’s shoes I’d be thinking about protecting my reputation.

And finally, why is Larry Ellison telling a non-story? It is odd isn’t it that Ellison, Mr Oracle, would come out and state that Autonomy had put itself up for sale and was talking to Oracle. Where is the story in that? And that it met both the company and its advisers—so what? I’d consign this to the Valley taking care of one of its own.

So what is really happening here?

In my view, it’s a smokescreen.

 Hp has a lot of bad news to get out of the way– it would not want to admit to another failed large acquisition, particularly one that took up over 85% of its then cash reserves, which at the time of the purchase Leo Apotheker correctly descibed as a “critical moment for Hp” (too true Leo, and that was 18 months ago). 

And so Hp hits out at the alleged perpetrators of a fraud and that becomes the story.Not that  Hp has just recognized another very expensive but failed transition, which was approved by all of its board. It’s quite savvy PR isn’t it—and add in pulling a favour from Larry Ellison to support the impression that everyone was duped and the story grows in credibility.

None of this should not distract attention away that another reinvention is on the way at Hp.

To back up my theory, try this link. I got directed at this site by a yoga friend, apparently in the software world the saying has been going around for a long time—Hp is where software goes to die.

Free IP Strategy Advice

It is hard to hide from the fact that Hp doesn’t quite know what it is any more or where it fits into a rapidly changed world. However, I’d suggest that against our Intangibles Tree Model™, Hp has two things that give it a start:

  • A still strong and trusted brand
  • Great know how and innovation capability.

What it really needs is a direction. A clear simple “we are going that way and not diverting” direction which takes these USPs and asks where can Hp now compete?

Oh, and it needs a leader. Meg Whitman’s appointment makes everyone think it’s going consumer as a key plank—or alternatively staying and extending consumer. But every time I see Nate Archibald or Serena Van Der Woodsen using an Hp laptop on Gossip Girl, why do I think “they would never be seen dead using an Hp”. Can you compete there—it’s hard to see?

And in enterprise? Hp is so far in time and maturity behind IBM that it will take a 10 year generation to get there.  But that’s where its relationship capital at least counts for something—Hp remains a trusted business brand. In fact, Apotheker’s vision from 2010 seems, in retrospect, exactly the way that Hp should go—captured well here.  Dont be too surprised to see new new Hp start to look in the same direction as the CEO it despatched.

We did think at one point that Autonomy may be a strategic asset for both a new resurgent Hp #2 to MSFT’s consumer ambitions, covering both consumer and enterprise in a world where there is still room for one more OS. Maybe this strategy might still apply, in which case there my be some real embarrasment when the time comes to write back up that Autonomy thing Hp almost killed. Quite what will be left of Autonomy after this last two weeks is hard to say.

As a PS I’d be thinking hard if I were Hp of replacing my PR agency. For the sake of a “sorry we messed up again” alternative line, the story that wasn’t the real story has likely knocked another 1 or 2 billion dollars off Autonomy’s valuation. Very sad to see a great product trashed.

Phew. I should turn this into an analysts report!

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Hp and Autonomy–I feel a blog post coming on

by Andrew Watson on 22 November 2012

It’s been a hectic few months and I’ve got out of the habit of blogging. There’s is much IP news around and some good informed debate (more of the former than the latter) but the Hp and Autonomy alleged accounting scandal caught my eye this week and seems worthy of debate. Noodling on the facts, here is what this appears to be about:

  • Hp announces it will buy Autonomy as a supposed central plank of the future strategy put forward by Leo Apotheker
  • It then disposes of Mr Apotheker, only months into his reign
  • But continues to buy Autonomy for a whopping $12bn
  • Apparently 15 different advisory firms involved in the transaction failed to spot the accounting “irregularity”–combined fees earned likely some £600-750m–anyone feeling uncomfortable?
  • And then, somewhat clumsily, loses the entire Autonomy management team (how can that be–did they think that the company would run by itself, when so much of Autonomy’s essence was its know how and trade secrecy?)
  • Then puts its own head of strategy in charge
  • And ends up 6 months later taking an $8.8bn (73%) write down against an asset acquired only 14 months beforehand.

Now that all takes some thinking through.

It is probable that Mr Apotheker’s original strategy saw Autonomy as a key asset in his strategic thinking (it would be hard to justify such a price premium otherwise) and it is also possible/probable that Autonomy’s big data solutions remained central to Hp’s strategy under the consumer focused Meg Whitman. It’s also possible/probable that withdrawing from the acquisition after Mr Apotheker’s demise would have been costly in terms of cash ( break fee and paying Autonomy’s adviser fees) and reputation (don’t ever sell to Hp, they can’t be relied on to close and change strategy like they change their underpants).

But at the heart of this are three interesting questions:

  • How was Autonomy valued? in the World of Motorola Mobile being worth $12bn to Google, Meraki being worth $1.2bn to Cisco and Instagram being worth $1bn to Facebook, true fundamental value cannot apply so one has, I think, to justify the  intangible  merger premium by a 1+1=4 logic.
  • What was the merger premium paid?
  • Was Autonomy a strategic acquisition in the first place, and if  it is no longer–does that justify the $8.8bn write down?

Mike Lynch was very impressive at the BVCA summit a few weeks ago, explaining what it takes to build a great company. I would also expect him to be a dynamic and charismatic negotiator. I’m trying to imagine the scene where he first persuades Apotheker to place a $12bn value on Autonomy, and then the scene revisted where Apotheker”s successor comes back in to say that Hp may want to change their minds. No mercy!

I’ll noodle on those three questions over the next few hours and attempt to answer them tomorrow. To this point its hard not to be more in Mike’s camp that “Hp are looking for scapegoats, and I don’t intend to be one…”.

 

 

 

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