Autonomy Founder Challenges H.P.’s Claims
SAN FRANCISCO — Mike Lynch was growing bored in a business meeting in London on Tuesday when his phone buzzed.
A text message from a friend informed him that Hewlett-Packard was taking an $8.8 billion charge. A few minutes later, another message said H.P. was putting most of the blame for the write-down on accounting problems at Autonomy, the company Mr. Lynch co-founded and sold to H.P. last year for $10 billion. There was talk of potentially criminal activities.
Since that jolt, Mr. Lynch has been unusually candid and vocal in defending himself and the company he built, rather than hiding out behind a phalanx of lawyers as might be expected. He says he was blindsided by a long-prepared public relations onslaught by H.P., little of which had to do with the substance of its claims about Autonomy.
"It's been a bit of a shock," said Mr. Lynch, who joined Hewlett-Packard in October 2011 but was fired by Meg Whitman, H.P.'s chief executive, in May. "The last time I talked to anyone there was in June, for about an hour."
Mr. Lynch was once the face of H.P.'s future, thanks to Autonomy's high-end business analysis software. Last week, he became the public face of what the company said was a vast, systemic fraud. (Read More: Autonomy Founder 'Shocked' by HP Allegations of Fraud.)
But in charging gross improprieties at Autonomy, H.P. has attacked a man who may be Britain's most notable and contentious technology executive, and one of Europe's biggest self-made successes. Mr. Lynch, 47, sits on the boards of the British Broadcasting Corporation and the British Library, and was awarded an Order of the British Empire for his service to business.
Before Hewlett-Packard bought Autonomy, it was listed on Britain's major stock index. Its prominence allowed it to hire top engineers, who were worked remorselessly hard compared with their Silicon Valley counterparts, former employees say.
People who have worked with Mr. Lynch note both his accomplishments and his temper. "I don't think I've ever called anyone an idiot in the office, but I'm direct," he said. "That's part of getting stuff done. I find good people and I value them. That is how I've been able to do what I've done."
While Autonomy is not well known in the United States, it was considered a pioneer in the booming field of Big Data, and its pattern-seeking algorithms are at work at over 400 companies, including Oracle, Adobe, Cisco and, even before the purchase, Hewlett-Packard. Mr. Lynch personally made about $800 million from the sale to H.P.
Even with all of his money, intellect and a doctorate from Cambridge, what Mr. Lynch says he cannot figure out is how H.P. thinks he has done anything wrong.
Hewlett-Packard has said that its internal investigation, set off by a whistle-blower, uncovered major problems at Autonomy that were present before the merger. Among them were the booking of hardware sales as higher-margin software sales, and resellers reporting sales that did not exist.
Mr. Lynch said Autonomy's sales fell off a cliff after it merged with Hewlett-Packard — not because it suddenly had to account for things legally, as H.P. claims, but because of institutional foot-dragging.
"They drove out the top 100 people from Autonomy, and a bunch of trainees were put in" to sell Autonomy products, he said. "H.P. salesmen got better commissions for selling our competitors' products."
Mr. Lynch said H.P. told him it could not formally approve Autonomy's software for use on its customers' servers, "when it was already running on thousands of H.P. machines around the world." He added: "H.P. has core structural problems."
Hewlett-Packard counters that Mr. Lynch was a singular force of resistance to the merger as soon as his check cleared.
"He was at every strategy session, was in person or on video for every meeting of the executive council," said an H.P. executive briefed on the investigation who spoke on the condition of anonymity because he was not authorized to speak on the record. "He wouldn't work with anyone. Sometimes he was enthusiastic, but other times he'd say, 'This makes no sense. I'm going back to London.' " (Read More: Under Fire: Dissecting the Words of Autonomy's Founder.)
On at least two different cross-country flights on an H.P. private jet, the executive said, Mr. Lynch went to the back of the aircraft and refused to talk with anyone for the entire flight.
A spokeswoman for Mr. Lynch, Vanessa Colomar, said he had not been on the corporate jet before and "didn't know the etiquette." She said he spent the time working.
As for the charge that Hewlett-Packard did not personally contact Mr. Lynch before announcing the write-down, Ms. Whitman said in an interview on Tuesday, "Mike Lynch is aware we have questions."
The conversation in June with Mr. Lynch concerned several specific software sales by Autonomy, the H.P. executive said. "He was evasive, not forthcoming, or he didn't remember," the executive said. "After something like that, you don't bother telling him what you are investigating."
Mr. Lynch said the conversation was supposed to be about his severance, but quickly became an "ambush."
Hewlett-Packard has said that it contacted both the Securities and Exchange Commission and Britain's Serious Fraud Office about Autonomy's accounting. Mr. Lynch said he had heard from neither organization.
The pattern of dysfunction at Autonomy that each side says the other fostered illustrates how hard it is for any two companies to fully understand each other before merging. It also calls into question whether what remains of Autonomy, a core element of Hewlett-Packard's plan for recovery, will quickly or easily deliver meaningful results.
Then there are the questions about how Autonomy's accountants, plus more than a dozen other highly regarded law, banking and accounting firms that received millions for working on the company's sale, could have missed the problems.
Deloitte, Autonomy's regular auditor, reviewed Autonomy's books on a quarterly basis, Mr. Lynch said, and was given invoices for every transaction over $100,000, plus those for a random batch of smaller deals.
Nigel Mercer, the Deloitte executive whose name appears on Autonomy's last annual report before the deal, did not return a call requesting comment. In a statement issued on Tuesday, Deloitte denied any knowledge of improprieties. (Read More: Was Autonomy Founder Aware of Accounting Problems?)
Howard Clabo, a spokesman for Hewlett-Packard, said that "when a group of people willfully distort the truth in their financial results, it can be very difficult to detect." At the same time, he said, H.P. is "committed to vigorously pursuing all legal options that are in the best interests of H.P. and our shareholders."
Mr. Lynch sees another possible motive in Ms. Whitman's huge write-down, which sent H.P.'s stock to a level it briefly touched 10 years ago: "There is an attempt to set the bar so low that you can't possibly fail."
Mr. Clabo dismissed this idea. "H.P.'s leadership is committed to providing our investors, employees and customers with a transparent view of the challenges the company faces," he said. "It is absurd to suggest that H.P. would take an $8.8 billion impairment charge for any other reason."
If Mr. Lynch is correct, then H.P.'s stock may be a huge bargain. But he isn't buying.
"They have no strategy and vision," he said. "This was about fighting among divisions."