UPDATE 3-Autonomy launches 500 mln-stg bond for acquisitions

* To raise cash for acquisitions, pay down debt

* Would also consider a return of capital to investors

* CEO says eyeing deals from autumn

* Shares down 5.5 percent

(Adds further comments by CEO, analysts; updates share price)

By Paul Sandle and Kate Holton

LONDON, Feb 10 (Reuters) - British search software company Autonomy AUTN.L launched a 500 million-pound ($779 million) convertible bond on Wednesday to fund acquisitions in new business areas and in North America, and pay down debt.

Shares in Autonomy fell as much as 7.1 percent, and closed 5.5 percent lower at 1522 pence, the biggest faller in the FTSE 100 index .FTSE, which analysts attributed at least in part to anticipation of the dilutive effects of the new bond.

Announcing the move just a week after announcing well-received fourth-quarter results, Chief Executive Mike Lynch said the company needed the cash for deals as its London-listed shares would be unpopular in North America. [ID:nLDE6120BY]

"You have to have the cash before you start any serious conversations," he told Reuters on Wednesday.

"We would like to explore a few ideas but the reality is the time between when you start a conversation and when you close a deal. We are talking about autumn onwards."

Lynch said he would look for opportunities to take Autonomy's patented meaning-based search technology into new areas -- a trick it had previously pulled off by buying Interwoven in early 2009, Zantaz in 2007 and Verity in 2006.

Autonomy's $775 million acquisition of Interwoven boosted its access to the worldwide legal and compliance industry. Large deals such as these have also helped propel the company into the FTSE 100.

"It's about where our technology has been successful and being able to increase the adoption of that technology."

Panmure Gordon analyst George O'Connor said he expected analysts' target prices for the shares to fall by 5-7 percent as a result of the dilutive effects of the convertible issue.

But O'Connor, who retained a "buy" rating on the shares, said while the timing could have been better the company does have a track record of growing through acquisition.

There were a number of new areas that the company could target, he said, including user-generated content, cloud computing -- whereby data and applications are stored and accessed over the Internet -- and behavioural tracking.

However, Numis raised concerns that the fund-raising and a deal to buy one of its resellers, announced on Tuesday, would reduce clarity in its second-quarter earnings -- the first in a long time that would have been unaffected by acquisitions.

"We estimate a 3 percent dilution to profit before tax until this capital is deployed," analyst David Toms said in a note.

He said traditionally a hyper-acquisitive model has been associated with slowing growth in a core business and Autonomy's last result showed pro-forma growth down to about 9 percent, which made further acquisitions attractive.

"In our view, Autonomy's management are electing to trade off rating for scale of earnings," he said.

However, Lynch said there was no slowdown in growth in the core business, pointing to results announced last week.

"Our earnings per share, in the middle of the downturn, has just gone up 50 percent," he said. "If anyone thinks that's slowing growth, then they are mad."

"More importantly, last year most software companies saw licence growth of -30 percent. We saw organic growth of 16 percent."

The company said the revenue picture presented in the fourth-quarter results, which was welcomed by analysts, would remain unchanged in the first and second quarters at least before any further acquisition could be completed.

RESELLER DEAL

On Tuesday Autonomy announced it had agreed to buy one of its U.S. resellers, Microlink, for $55 million in cash. [ID:nRSI9087Ga]

Lynch said that deal was about getting improved access to U.S government contracts that required security clearance rather than signalling a move towards resellers, which generally have low margins.

"By having our own cleared operation, we can bid directly and we can get a bigger slice of the action," he said. "It's very specific to do with the U.S. cleared security base."

BOND TERMS

In a statement on Wednesday, Autonomy said the five-year bond would be converted into ordinary shares and would have an initial conversion price of 20.6334 pounds. The bonds will carry a semi-annual coupon of 3 percent to 3.5 percent per year.

It would be converted into shares at an expected initial premium of 30 to 40 percent above the average price from launch to offering. Settlement and delivery of the bonds is expected to take place on March 4.

Autonomy's gross cash balance at the end of 2009 was $242.8 million with net cash of $45.3 million. ($1=.6415 pounds) (Editing by Greg Mahlich)