* Apotheker was in a hurry to make a transformative deal
* Approached at least 3 other companies over deals-source
* HP ignored warning signs as it did due diligence-sources
* Autonomy founder rejects HP accounting fraud allegations
By Poornima Gupta and Nadia Damouni and Paul Sandle
SAN FRANCISCO/NEW YORK/LONDON, Nov 30 For Leo
Apotheker, the former Hewlett-Packard CEO, a July 2011
meeting with Autonomy founder Mike Lynch at a chic seaside
resort in France was pivotal to his effort to remake a storied
In the nine months since taking the helm at HP, Apotheker
had tried furiously to find a way to move the lumbering company
away from its low-margin computer hardware business and into the
lucrative corporate software and services arena. Apotheker was
looking for a big, transformative acquisition, two people
familiar with the situation said, and after overtures to several
companies went nowhere, he set his sights on Autonomy.
After two months of negotiations on what was known at HP as
"Project Tesla," Apotheker sat down with Lynch at a hotel in
Deauville on the Normandy coast - and shook hands on what would
become an $11.1 billion deal.
The Autonomy takeover was indeed a bombshell - but not in
the way that Apotheker had hoped. When it was announced in
August 2011, HP's stock plummeted amid withering criticism of
the price tag. Within weeks, Apotheker was out of a job. Within
months, Lynch and his new masters at HP were at war.
Inside a year, Lynch had been forced out and HP was
investigating allegations of major accounting irregularities at
Autonomy. That culminated in HP saying last week it was writing
off more than three-quarters of the value of Autonomy, and
telling U.S. and UK regulators about alleged accounting fraud.
The implosion of the Autonomy deal has raised questions
about how HP and its army of lawyers, accountants and investment
bankers could have overlooked warning signs and gone ahead with
Reuters spoke with close to a dozen people directly
connected with the deal or the accounting investigation. The
picture that emerges is of a company so desperate to plot a new
course that it may have been far too accepting of Autonomy's
published and audited accounts.
It has also cast a shadow over Lynch, widely regarded as a
brilliant but difficult executive; he left HP in May and has
flatly rejected the company's claims of accounting shenanigans
or that HP had been deliberately deceived.
CEO'S ROCKY REIGN
Apotheker's appointment as CEO of HP in November 2010 was
greeted even at the time with head-scratching - and criticism. A
veteran of the German corporate software maker SAP, he
had no obvious qualifications to run HP - a company with sales
several times SAP's - especially given his lack of experience in
the computer hardware business.
But the U.S. company was reeling from a series of boardroom
imbroglios that culminated in the firing of then-CEO Mark Hurd
in a sexual harassment scandal in August 2010.
Apotheker went on the acquisition trail almost immediately,
even though previous HP takeovers like Compaq and Palm had not
worked out well. He was given the mandate of moving HP in a new
direction - software seemed logical given the decline in HP's
traditional computer business - and felt the need for a
transformative acquisition to do that, according to one of the
He "knocked on a number of doors," according to another of
the sources, looking as far and wide as the telecom software
companies Comverse Technology and Amdocs , and
corporate software maker Tibco Software.
It's not clear how far talks with those three progressed.
According to one of the sources, HP backed off from Comverse
because the company was not current with its published accounts
and because of previously disclosed involvement in an options
accounting scandal. HP could not agree on a price with Tibco,
and Amdocs rebuffed it, saying the time wasn't right for a deal.
Spokespeople for Amdocs and Comverse declined to comment.
Tibco did not respond to requests for comment.
Apotheker then set his sights on Autonomy. It was a pioneer
in the up-and-coming field of "big data" - software that can
separate the wheat from the chaff in huge mountains of corporate
data - and could serve as a centerpiece for the new strategy.
This time, Apotheker was determined not to miss out.
He was "not being able to really have anybody dance with him
at the right price," said the source with direct knowledge of
the deal. "What happened is he talked to Autonomy and they got
into a dialogue and he told the board that we have to do
something," this person said. "It was out of frustration and
desperation to a large degree."
HP began looking at Autonomy in earnest around May last
year, bringing in investment bank Barclays as adviser. Boutique
investment bank Perella Weinberg Partners had already been hired
to look at ways of restructuring HP's businesses.
In early July of 2011 the board met to do a two-day review
of the rationale behind the acquisition. During that process,
the board set guidelines for the deal, including the price, and
agreed on a process to do due diligence, two people familiar
with the process said. It voted to enter into negotiations at
the end of the two days.
Throughout the process, Apotheker remained in direct contact
and consulted with HP Chairman Ray Lane, the person said, adding
that Lane - a former top executive at software giant Oracle
- encouraged management to proceed with the deal.
By the end of July, Apotheker and Lynch - who were
previously acquainted because HP was an Autonomy customer -
narrowed down financial terms at the hotel in Deauville, though
didn't finalize the price.
Also present was then HP chief strategy officer Shane
Robison, who has been credited by HP with being the main
architect of many of HP's larger deals, including another
troubled acquisition - its purchase of technology services firm
EDS. Robison was pushed out of HP shortly after Apotheker left
At the meeting, Apotheker presented HP's view about putting
the companies together - with Robison chipping in when needed,
one source said. Robison, who has not spoken publicly about
Autonomy's accounting issues, did not respond to requests for
comment sent to representatives at Fusion-io and Altera Corp,
companies where he is a board member.
For some weeks, both sides went back and forth on the
price, with Robison playing a pivotal role in pitching the deal
internally, and getting it finalized. Inside HP, it was seen as
Apotheker's and Robison's deal, the sources said.
In the end, uber-dealmaker Frank Quattrone, whose Qatalyst
Partners was representing Autonomy, proved instrumental in
securing for its shareholders the lofty price tag, according to
another source familiar with the negotiations.
While the price haggling was going on, a large due diligence
team numbering in the hundreds, including internal HP staff from
all relevant departments like finance, poured over Autonomy's
books, examined contracts, and interviewed Autonomy's top
executives, sources said. External experts involved in the
process included accounting firm KPMG, law firms and bankers.
Due diligence was seen being straightforward as Autonomy had
been filing its accounts publicly and they had been audited. One
source said the month-long process was extensive and meticulous
but nothing special.
During this time, HP posed a litany of questions to Lynch
and Autonomy Chief Financial Officer Sushovan Hussain about
accounting rumors surrounding the company, one of the sources
knowledgeable with the deal said. But Autonomy executives
provided explanations for all of them, this person said.
HP would not elaborate on the specific issues it raised. But
questions about Autonomy's books had surfaced as early as 2009,
when renowned short seller Jim Chanos identified Autonomy's
shares as a shorting opportunity based on concerns such as how
reported margins of around 50 percent did not seem to translate
proportionately into cash flow.
His other concern was how it could report double-digit
growth in software license revenue while rivals battled
shrinking sales, according to a source familiar with his views.
Asked on CNBC last week about whether the board had
discussed with Apotheker the speculation about Autonomy's books,
HP's current CEO Meg Whitman said: "Not when I was on the board.
What I do know is that after we announced the acquisition there
were a number of blogs that came to the fore about potential
issues at Autonomy. The former management team ran that to
ground and came up with the conclusion that there was nothing
HP officials now say they were deceived.
Apotheker said last week he was "stunned and disappointed"
to learn of Autonomy's alleged accounting issues. He declined to
be interviewed for this story through a spokesperson.
As the deal was being considered, HP CFO Cathie Lesjak did
raise questions about HP's ability to pay such a high price and
whether it could integrate Autonomy well, sources said.
Lane said the board approved the deal based on the
recommendation of management. "That recommendation was based on
misleading audited financial statements and misrepresentations
made by Autonomy's executives," he said in an email. "In
hindsight, we shouldn't have done the Autonomy deal at such a
high price. We were lied to and as a result, we got it wrong."
By the time the deal was agreed, though, Apotheker was
already running out of time. He had wanted to sell HP's personal
computer business but was unable to complete a deal. He
announced a strategic review of the division - to the horror of
many employees and the consternation of some of its customers.
That misstep, along with series of missed financial
targets, led to Apotheker's firing in September 2011 - before
the Autonomy deal had even closed. Board member Whitman - who
had voted in favor of buying Autonomy - then took over as CEO.
The acquisition still went ahead - and quickly went south.
BRUTAL CULTURE CLASH
The clash between HP's polite, slow-moving bureaucracy and
Autonomy's in-your-face sales culture could not have been
starker. Lynch also chafed at his new, subordinate position,
according to the sources. He routinely shut HP management out of
key decisions and - true to his company's name - resisted full
integration with HP. He complained constantly about red tape.
After he was forced out in May of this year, Lynch returned
to HP in June to discuss severance. But he found himself on the
receiving end of a barrage of questions about Autonomy's
accounting, sources briefed on the investigation told Reuters.
HP General Counsel John Schultz quizzed Lynch specifically
on a range of accounting items, including at least three sales
deals from a couple of years before, one of the sources said.
Lynch's reply to most questions was that Deloitte, its auditor,
signed off on various items, or he could not remember specifics.
"If there were no problems, he could have explained it," one
of the sources said. "He simply refused to have the
But Lynch was caught unaware: Hence he did not have
information about those deals at hand, said a source familiar
with his version of events. Lynch's spokeswoman said that the
allegations HP made last week "were not put to him in June."
The legal struggle has only just begun. HP has handed
documents over to the U.S. Securities and Exchange Commission
and the UK Serious Fraud Office, and the U.S. Department of
Justice is also involved, a source told Reuters last week.
HP also on Tuesday threatened legal action against parties
involved, though stopped short of naming targets. HP has
challenged Lynch to answer questions under penalty of perjury.
"He ran this company like a small private company, he was
involved in all facets of the company, he was extremely hands
on," said a source close to the matter who knew the former
Autonomy CEO. "For Lynch not to know about this, if it is truly
happening, would be far-fetched."