August 19, 2011 / 3:10 PM / 8 years ago

Lynch guides Autonomy into big tech's grasp

LONDON (Reuters) - Mike Lynch once claimed to enjoy watching sheep-dog trials. The software business he founded that is now at the heart of Hewlett-Packard’s new strategy makes its living herding cats.

Autonomy Plc software searches and organizes complex data like emails, phones calls, video and even tweets, using patented algorithms based in part on a mathematical theory developed in the 18-century by Reverend Thomas Bayes.

In the 21st-century, that kind of “unstructured” data is growing exponentially, and regulators demand that companies, particularly in the financial and legal fields, keep tabs on it.

Tim Daniels at Olivetree Securities said Autonomy’s IDOL (Intelligent Data Operating Level) software helps companies solve the headache of tracking this data.

“Clients now don’t have a problem accumulating data, the problem is the structuring of it — 80 percent of the data on the web now is unstructured (video, pictures, emails etc),” he said.

HP is paying $11.7 billion for Autonomy.

Lynch, along with his special brand of abrasive intellectual charm, comes as part of the package. He will still wake at dawn to speak to customers in Asia and end his day late at night with calls to California, despite netting about 465 million pounds ($766 million) for his 8.2 percent stake.

“He doesn’t suffer fools gladly, but look at his track record,” said one colleague who has known Lynch since the late-1990s.

Deutsche Bank analyst and former employee of Autonomy Marc Geall last year criticized Lynch for running a mature company “like a startup” — with management spread to thin, but for other sector watchers, that trait is to be admired.

“He’s one of a rare breed in the UK to have grown a FTSE 100 software company from scratch,” said Richard Holway of TechMarketView.

Hewlett-Packard’s move on Autonomy and its broader strategy switch takes it down the same path as IBM, which in 2005 which sidelines PC hardware in favor of higher-margin software and services.

Lynch, who built Britain’s largest software firm from beginnings in Cambridge, England in 1996, said it was a “momentous day in Autonomy’s history,” and selling to HP would provide a platform to bring its technology to a world-leading stage.

IDOL

Tim Daniels at Olivetree Securities said Autonomy’s IDOL (Intelligent Data Operating Level) software helps companies solve the headache of tracking data.

“Clients now don’t have a problem accumulating data, the problem is the structuring of it — 80 percent of the data on the web now is unstructured (video, pictures, emails etc),” he said.

Acquisitions by SAP (for Hana) and Oracle (for Exadata) had been focused on this as a product area, he said. “HP buying Autonomy would fit into this too.”

Autonomy is relatively unknown outside the software world, although it has taken steps to raise its profile, such as sponsoring Premier Football Club Tottenham Hotspur’s shirts.

Lynch said that was purely a business decisions. He once claimed to prefer sheep-dog trials.

Tougher data regulation has helped Autonomy grow throughout the downturn of the last three years as levels of unstructured data explode, a key attraction for HP.

“This is a milestone moment because there is a very real and concrete need for our customers to address the explosion of unstructured and structured information,” HP’s Co-CEO and President Leo Apotheker said.

Autonomy’s software, which analysts say has no direct competitors, can identify patterns in the data deluge to enable airlines to suggest alternative flights, banks to track insider dealing, and security services to identify potential terrorists.

The U.S. giant has offered a hefty premium of 78 percent on Thursday’s closing price to buy Autonomy.

Analyst Milan Radia at Jefferies said the deal gave HP an “exceptionally strong starting point” in the enterprise software market.

“Today, software accounts for only about 2 percent of HP’s revenue,” he said. “By way of comparison, IBM’s software journey only commenced in 2001 with a $1bn acquisition, followed by a series of major transactions.”

He said the strategic value of Autonomy’s technology and capabilities was recognized by other vendors such as Oracle, IBM and EMC given that they were all licensees of its software.

“However, Mike Lynch’s ongoing contribution will probably be deemed vital, making gatecrashers (rival bidders) less likely,” he said.

Despite growing to become one of the few world-class UK tech companies, Lynch has had a rocky relationship with the City of London, with some analysts saying growth at the company has come largely from acquisitions.

Paul Morland, who had a “sell” rating on Autonomy, said shareholders should quickly accept “this truly golden offer,” which was well 30 times for single digit earnings growth and about three times what the business would have cost just three years ago.

“Having followed Autonomy since it floated in 1998, we doubt it is the answer to HP’s strategic problems, and we do not expect IBM and Microsoft to be quaking in their boots.”

Lynch has said the critics do not understand Autonomy’s business model, which is seeing more and more revenue coming from cloud computing and thus recognized over longer periods, and they do not fully understand the group’s technology.

One Silicon Valley giant thinks he is right.

Reporting by Paul Sandle; Editing by Hans Peters and Andrew Callus

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