Wednesday 23 May 2018

Irish tech tycoon allegedly wanted to take over Hewlett Packard from inside

Peter Flanagan

Peter Flanagan

THE Irish head of the controversial software company Autonomy wanted to take over Hewlett Packard from the inside, it has been alleged.

HP bought Autonomy in October 2011. That deal resulted in a payout estimated at more than €600m for Michael Lynch, a Tipperary native who set up the company in 1996.

Mr Lynch left the company in May after Autonomy's revenue missed market expectations, but on Tuesday HP shocked markets by writing down the value of the company by $8.8bn (€6.9bn).

About $5bn of that came amid what it called "disclosure failures and outright misrepresentations at Autonomy" before HP bought it. Mr Lynch has denied all suggestions of impropriety.

Now, however, it has been alleged that Mr Lynch had hoped to essentially run a reverse takeover of the much bigger HP and planned to eventually be running the company itself.

"Mike and the team genuinely thought that they were taking over HP in order to transform the IT industry," said one industry insider. "It was clear that Mike thought he had taken over HP."

"The attitude was that we were a Trojan horse within HP," the person added.

Mr Lynch has vigorously denied any malpractice in Autonomy's accounting practices before the buyout, insisting that extensive due diligence was done on the company.

The row has shocked the technology industry in the UK, where Mr Lynch is one of the business's most recognisable faces. He founded Autonomy in the mid-1990s on the back of his doctoral thesis at Cambridge and parlayed it into a multi-billion euro company.

The bust-up has now turned the spotlight on the accountancy industry, in particular the different standards that are used on either side of the Atlantic.

HP's general counsel John Schultz claimed Autonomy created more than $200m in revenue over a two-year period from 2009, well below the $1.6bn recorded in their annual accounts for 2009 and 2010.

While denying the allegations as "utterly wrong", Mr Lynch said there were three areas where accounting rules gave scope for differences of interpretation.

The International Accounting Standards Board (IASB) has devised International Financial Reporting Standards (IFRS), used in more than 100 countries, the basis for Autonomy's accounts prior to HP's acquisition.

But many US companies such as HP use US Generally Accepted Accounting Principles (GAAP), which can differ from IFRS, notably in respect of software revenue recognition.

One of the accusations HP levels against Autonomy's former management is that the company was booking licensing revenue up front before deals closed, thereby inflating revenue.

"Revenue recognition for software vendors can be complicated, to say the least," accountants Grant Thornton said.

This is because software companies often bundled products and services such as licences, installation, training and maintenance support into a single contract.

Under accounting rules, a company can establish a model for pricing different parts of the contract so that some revenue can be taken upfront and the rest over the period of the contract.

Under US GAAP there are more stringent conditions to satisfy, requiring what is called VSOE, or vendor-specific objective evidence.

"It shouldn't be a surprise this issue is coming up. It shows how loosey-goosey IFRS is," said Lynn E Turner, former chief accountant of the Securities and Exchange Commission. (Additional reporting by Reuters)

Irish Independent

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