Hp and Autonomy appear to “ go to war” (or is Hp just laying down a smokescreen?)

by Andrew Watson on 27 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!

{ 5 comments… read them below or add one }

Nick White - Tangible IP 11.28.12 at 12:34 pm

LOL Andrew you do make me smile. I may be opinionated but sadly I can’t take credit for this one. I have seen comments from many that are better qualified than I who have made the observation. As for the allegations of impropriety I have no opinion. I was just stating the facts. What seems to have precipitated the downgrade was a whistleblower. To suggest that it was some sudden enlightenment about lack of fit etc is not credible although I suppose anything is possible with HP. We need to wait for the fat lady to sing on this one.

Andrew you disappoint me. $130 billion is turnover. As we all know turnover is vanity profits are sanity; their revenue is around $7billion. Turnover is the least important metric in determining value…any value. Have a read of this as it will I am sure put more meat on the car/train crash observation as many think HP is a repeat disaster and it wont be long before they go the way of Kodak.

http://www.guardian.co.uk/business/2012/nov/21/hp-figures-bigger-problems-autonomy

In the IP context you should be looking at these figures:

Market capital value of HP at its peak $133 billion. Market capital value of HP at or around Autonomy acquisition $95 billion. Market capital value of HP today is around $24 billion.

That by any standards is a haemorrhaging of shareholder value on the watch of some fairly new top-level employees!

I think you are right that a significant part of the IP value in Autonomy has walked out of the door. Mike Lynch for sure but many more probably more important key people have left. I don’t necessarily agree that Autonomy has demonstrated a smart IP strategy. The argument around trade secrets and patents is not an either or argument and when ones sees so many in this space embracing both you have to ask why Autonomy thought it was smart to do one almost to the exclusion of the other.

Looking at HP I am not sure I can agree they have IP strength or have demonstrated this. For one thing if 80% of their value is IP (typical figure quoted for US Big Cos) then a collapse from $133 billion to $24 billion is one hell of a drop in IP value.

Then you have the situation where despite having a high ranking brand (you need to look at the drivers behind this ranking I think it is irreversibly tainted) and despite having a pool of know-how and world class pool of innovative human capital and despite a portfolio of 37,000 patents, 4000 of which are up for sale………….it makes revenues of $7 billion on $130 billion sales and its going south.

My interest in this is that it busts the myth that IP is where we should focus these days as a sort of new paradigm. HP and Kodak have clearly nailed that one. At the end of the day “Its the business stupid” and no amount of IP will save you if you get that fundamental completely wrong. Those that excel get the synergy right but only after they have the business pointing in the right direction.

Andrew Watson 11.28.12 at 4:14 pm

Always good to exchange contrary views Nick. Can’t disagree on the patent comments that they are no substitute for great innovation. Interesting what you say about their IP strategy–I was making the point that for Autonomy as a company trade secrecy was the right primary route. Its then intriguing to ask–so where are these trade secrets, can I touch and feel them given that I’m paying several billion to acquire them.

Nick White - Tangible IP 11.29.12 at 7:53 am

That’s a key issue in the patent world at present. Increasingly there is a disconnect between patents, business and innovation and the purpose of the patent system. Just been to a recent meeting talking about patents monetization and I asked what about the underlying technology and innovation. Blank faces around the room!

We also talked about the last point. Many companies lose their know-how legacy but should have a good grip on trade secrets. The issue is that trade -secrets are only the tip of the know-how iceberg. You don’t have to see the whole iceberg to have a good idea of the magnitude of the know-how and to know it is there. If you can’t see the tip of the iceberg then you have a problem. Or indeed if the tip of the iceberg just melts away. The key thing in this space is that we are talking about a lot of stuff in peoples heads, individually and collectively. The question for HP is can those who come in cold to the situation keep the iceberg intact is enough of the know-how codified is there enough relevant people to maintain some cohesion? They do not have a good track record in this regard. Perhaps the most important intangible assets in this whole mix that should have been at the forefront of their minds at the start of the interaction was their own. Do we have the know-how and ability to do this? Autonomy as a free-standing subsidiary is one thing, alongside the HP core co-operating and over time integrating. Trying to push two very different pools of know-how and intangible assets together at a pace is almost like having two trains racing towards each other on the same track and if the points dont’t work…crash. The Autonomy collapse within HP must have had some negative impact on the core HP capability. Perhaps that will turn out to be the real IP issue here for HP, not the loss of an opportunity but damage to the core legacy.

Andrew Watson 11.29.12 at 8:27 am

OMG. Red letter day. We agree.

Andrew Watson 11.29.12 at 8:39 am

Predictable but noteworthy. An HP shareholder sues the two accounting firms and the HP executives and board (but oddly not the former Autonomy management) for failed and inadequate diligence. Only in the US. On discovery, I’d be asking to see the board paper approving the acquisition. http://uk.mobile.reuters.com/article/idUKBRE8AS00220121129?irpc=932

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