AllThingsD » Mike Lynch

HP CEO Whitman Tries Not to Talk About Autonomy in London

Arik Hesseldahl — Wed, 10 Apr 2013 23:05:50 +0000

Hewlett-Packard CEO Meg Whitman was in London today ostensibly to talk about Project Moonshot, the new class of servers that HP hopes will contribute meaningfully to its promised turnaround.

But the only thing any of the assembled journalists she’s had contact with have wanted to discuss is Autonomy, the British software firm that HP acquired in 2011 and on which it blamed the majority of an $8.8 billion write-down.

The magnitude of the accounting improprieties, Whitman said in interviews with The Guardian and The Telegraph, were such that HP had to report its findings to regulators on both sides on the Atlantic. She also ruled out any notion that HP is interested in selling off Autonomy — such rumors are apparently still in the air in the U.K. — calling it “critical to our strategy.”

Here’s Whitman in an interview she did with the BBC, which starts with her being asked whether it was “wise” for HP to attack Lynch and the rest of Autonomy’s former management team.

HP Wants Nothing More Than a Quiet, Uneventful Shareholder Meeting

Arik Hesseldahl — Wed, 20 Mar 2013 13:29:17 +0000

Hewlett-Packard will today convene a meeting of shareholders in Mountain View, Calif. The proceedings are generally expected to be routine, which one might not expect, given the rocky period through which the company has been passing of late.

CEO Meg Whitman will make a presentation, essentially reiterating her plan to rebuild and repair HP’s foundations in 2013, and to nudge it back over the line to revenue and profit growth in 2014 and beyond. Analysts have generally turned cautiously optimistic toward HP, especially since its last quarterly earnings report.

Numerous shareholders are seeking to rattle both HP management and its board of directors by opposing the reelection of as many as five of those directors. One powerful proxy advisory firm, Institutional Shareholder Services, is urging shareholders to vote against Chairman Ray Lane and directors John Hammergren and G. Kennedy Thompson. Another proxy firm, Glass Lewis, is opposing four directors, including Hammergren and Thompson, as well as Marc Andreessen and Rajiv Gupta.

Calpers, the powerful California pension fund, has vowed to vote against all five: Lane, Andreessen, Hammergren, Thompson and Gupta, and will also vote against ratifying Ernst & Young as HP’s auditor.

The most likely outcome is that the directors under fire will survive the proxy vote, though of the five directors catching the most heat, Hammergren and Thompson are generally seen as the most vulnerable.

Of course, the day of HP’s shareholder meeting wouldn’t be complete without some fireworks from Mike Lynch, the former CEO of Autonomy, the British software company for which HP paid $11 billion in 2011, only to write its value down about half a year later.

In an open letter to HP shareholders, Lynch reiterated complaints, and asked some interesting questions about HP’s accusations that he and his lieutenants essentially inflated Autonomy’s value before HP acquired it. The text is below:

U.K.'s Serious Fraud Office Is Investigating HP's Autonomy Allegations

Arik Hesseldahl — Mon, 11 Mar 2013 22:22:55 +0000

Hewlett-Packard just filed its regular form 10-Q, or quarterly report, with the U.S. Securities and Exchange Commission, and it contains some news.

In the filing, HP discloses that it has been told by the Serious Fraud Office in the United Kingdom that the SFO has opened an investigation into the allegations that HP has leveled at Autonomy, the British software company for which it paid about $11 billion in 2011, only to write down its value by $5.5 billion in 2012.

HP had previously said it had reported its findings to the SFO, but this constitutes the first official disclosure that an investigation by that agency is under way.

It further explains a report by the Daily Mail last week, saying that Mike Lynch, Autonomy’s founder and former CEO who is at the center of many of the accusations, has hired Reid Weingarten of Steptoe & Johnson as his defense lawyer. Weingarten is know for having represented filmmaker Roman Polanski and Enron executive Richard Causey.

It also makes the SFO the second regulatory body in that country to have Autonomy in its sights. Last month the U.K.’s Financial Reporting Council launched its own probe into the matter. The U.S. Department of Justice has been investigating it since last fall.

Here’s what HP says about it:

Facebook Nabs Brunswick's Buckley for Top Communications Job

Kara Swisher — Thu, 31 Jan 2013 18:00:35 +0000

Brunswick Group’s Michael Buckley, who has been working with Facebook on a range of corporate and other PR issues over the last several years, will be joining the social networking giant as VP of business communications.

Buckley is essentially taking the job held by well-known Washington, D.C., player Joe Lockhart, who left the company last fall.

In his new job, Facebook said that Buckley would be in charge of the company’s international, monetization, corporate, consumer and policy communications.

Buckley has been with the global strategy and communications consultancy Brunswick Group, one of Facebook’s outside agencies, for a decade, most recently as a U.S. managing partner, where he represented a number of clients at once. In tech, that has included Groupon’s Andrew Mason, as well as Mike Lynch of Autonomy, which is battling Hewlett-Packard right now.

At Facebook, he will report to Elliot Schrage, who is VP of communications and public policy, where Buckley will be one of three top execs in that organization. The others are VP of tech communications Caryn Marooney, and Marne Levine, VP of global policy.

More From Mike Lynch: HP's Autonomy Accusations Are Getting Weaker

Liz Gannes — Fri, 28 Dec 2012 20:48:19 +0000

While Hewlett-Packard may have struck the first blow in its fraud charges around its Autonomy acquisition, former Autonomy CEO Mike Lynch hasn’t stopped swinging since.

Today, Lynch asserts that HP is “backtracking” on its claims against him and the Autonomy management team — because its latest statements can be read as less broad and assertive than those of the past.

On Nov. 20, HP blamed Autonomy’s former management team for more than $5 billion worth of write-downs regarding the 2011 acquisition. Yesterday, it disclosed in a financial filing that it had persuaded the U.S. Department of Justice to officially look at the issue. Lynch quickly responded with a lengthy public statement reiterating his defense, demanding more information from HP, and attesting that he had yet to be contacted by any regulatory authorities.

But what’s one statement about a statement about a statement when you can make two? Today, Lynch’s PR team sent another lengthy comment from Lynch, this time dissecting the language used in HP’s 10-K filing on Thursday.

Lynch claims there’s hidden meaning in the succinct legalese of the financial filing that backtracks from what HP originally said on Nov. 20.

For instance, the Nov. 20 statement — which was given in the form of a press release and conference call — blamed the majority of the multi-billion-dollar write-down on “serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation that occurred prior to HP’s acquisition of Autonomy.” The Dec. 27 filing explains that estimates of lowered value for Autonomy “incorporate HP’s analysis of what it believes were accounting improprieties, incomplete disclosures and misrepresentations at Autonomy.”

For Lynch at least, that’s a smoking gun. The alleged fraud has been downgraded from driving the “majority” of the write-down to just being “incorporated” as a part of it.

Update: HP responded to these latest charges with a statement of its own, saying its position has not changed. Here’s that:

And here’s Lynch’s full statement:

Mike Lynch Punches Back at Today's HP Filing: Whither $5B Writedown?

Kara Swisher — Fri, 28 Dec 2012 01:32:29 +0000

Autonomy founder Mike Lynch is still not backing down in his ongoing battle with Hewlett-Packard.

“Simply put, these allegations are false, and in the absence of further detail we cannot understand what HP believes to be the basis for them,” he said in a statement, as well as aiming at $5 billion in writedowns the company has taken related to the controversial deal. “We continue to reject these allegations in the strongest possible terms.”

Lynch’s latest volley was prompted by a regulatory filing HP made earlier today, noting that the U.S. Department of Justice was indeed investigating its acquisition of British software company, for which it is trying to write down about $5 billion in expenses due to alleged “serious accounting improprieties.”

HP had taken the case to U.S. federal authorities in the first place, but now it’s official.

This caused Lynch, who has been vociferously battling the Silicon Valley tech giant over the allegations and rejecting HP’s claims of fraud in the $12 billion acquisition, to respond again.

In his statement, he presented a laundry list of arguments about how HP is trying to fool investors by pointing the finger at him.

Here’s his whole thing, so you can read for yourself:

HP Confirms DOJ Is Investigating Alleged Fraud in Autonomy Deal

Liz Gannes — Fri, 28 Dec 2012 00:15:31 +0000

Hewlett-Packard said today that the U.S. Department of Justice is investigating its acquisition of Autonomy, for which it is trying to write down about $5 billion in expenses due to alleged “serious accounting improprieties.”

The investigation confirmation came as part of HP’s annual report filed with the Securities and Exchange Commission. But this move was entirely expected given HP took its case to the FBI/DOJ and the SEC in the United States as well as the Serious Fraud Office in the U.K.

HP said it was alerted by the DOJ on Nov. 21 that it had officially opened an investigation about Autonomy.

Former Autonomy CEO Mike Lynch has strenuously rejected HP’s claims and has demanded to see evidence for them.

A spokesman for HP declined to comment on the matter.

Yes, There Are Layoffs Pending at HP's Autonomy Unit in the U.K.

Arik Hesseldahl — Mon, 24 Dec 2012 18:00:00 +0000

There are layoffs coming at Hewlett-Packard’s U.K.-based Autonomy software unit, but not quite so many as a report in the Daily Mail suggests.

That newspaper reported today, in a thinly sourced story, that as many as 200 people were due to lose their jobs at the British software subsidiary in a shake-up expected soon.

Sources familiar with the company’s plans tell AllThingsD that the number of jobs expected to be cut is actually fewer than 70; the cuts will focus on sales personnel, all of whom were originally hired prior to HP’s acquisition of the company. Additionally, the job cuts were put in motion in September, well before HP made public its intention to write down the value of Autonomy by about $5 billion. Layoffs in European countries, like those in the U.K., are more complicated to carry out, and so take months to complete.

In explaining the writedown, HP, which paid north of $11 billion for Autonomy in 2011, alleged that the British company’s executives essentially cooked the books in order to make Autonomy appear more valuable than it was. It has reported its findings to the U.S. Securities and Exchange Commission and the U.K.’s Serious Fraud Office.

Mike Lynch, the founder and former CEO of Autonomy, has rejected HP’s allegations, and accused it of mismanaging the company after the acquisition closed.

Former HP CEO Shifts Blame for Autonomy Deal to Chairman

Arik Hesseldahl — Fri, 14 Dec 2012 01:26:59 +0000

Ever since Hewlett-Packard said it would write off $5 billion for Autonomy, the British software firm for which it paid north of $11 billion last year, a lot of blame has been cast on Léo Apotheker, the CEO who led HP at the time.

Today, for some reason, he decided to reach out to Bloomberg News with an emailed statement. The point? Apparently to remind the world that he wasn’t the only one making decisions at the time regarding the deal that ultimately cost him his job.

According to the Bloomberg report, Apotheker says that “no single CEO is ever able to make a decision on a major acquisition in isolation, particularly at a company as large as HP — and certainly not without the full support of the chairman of the board.” He then turns his guns on Chairman Ray Lane, without mentioning him by name: “The HP board, led by its chairman, met many times to review the acquisition and unanimously supported the deal, as well as the underlying strategic objective to bolster HP’s market presence in enterprise data.”

Indeed, he has a point. It’s also worth remembering that the board at the time included HP’s current CEO, Meg Whitman, who took over the job in the wake of Apotheker’s ouster less than a month after the Autonomy deal was announced.

There was more to call Apotheker’s competence into question that day — Aug. 18, 2011 — that contributed toward his stint as CEO being cut short. HP fell short on earnings, and he also launched the ill-fated effort to spin off the PC unit as a separate company, and killed the Palm handheld and tablet unit acquired only a year earlier by his predecessor Mark Hurd.

Clearly, Apotheker doesn’t like getting all the blame for the deal. Lane was certainly at the table, and lent his support for it. And, for that matter, so was Whitman.

Consider yourself reminded.

Dell Passed on Autonomy Before HP Bought It

Arik Hesseldahl — Mon, 10 Dec 2012 15:05:03 +0000

An incremental and interesting detail emerged today in the ongoing wrangle between Hewlett-Packard and the former CEO of Autonomy, and it has come from an unexpected quarter.

Michael Dell said in an interview with the U.K.’s Sunday Telegraph newspaper that Autonomy was shopped to Dell before it wound up in the hands of Hewlett-Packard in 2011.

Dell, CEO of the personal computer and IT concern that bears his name — a company that has been aggressively acquiring software companies in recent months — said he was approached by Autonomy. He passed on the opportunity because it was, in his words, “obviously overpriced.”

The story doesn’t go into any detail about how Dell was approached or when, but it raises some eyebrows for a few important reasons, none of which are entirely helpful to former Autonomy CEO Mike Lynch’s version of events.

On the other hand, it doesn’t make HP’s management team at the time, including former CEO Léo Apotheker and then-director now-CEO Meg Whitman, look any smarter in hindsight.

Recall that Oracle CEO Larry Ellison made a similar claim about passing up on an approach by Autonomy. It’s a sensitive topic because as a British company, it would have been illegal for Autonomy to be “shopping” itself around to potential buyers without first disclosing the fact to shareholders, though rumors that it was in play had been making the rounds since late 2010.

Lynch initially denied Ellison’s version of events, only to have Oracle produce not one but two sets of PowerPoint slides produced by investment banker Frank Quattrone, slides that looked an awful lot like they were intended to help make a deal. Quattrone conceded after a bit of PR back and forth that he had been quietly pitching Autonomy to Oracle as a potential acquisition independently of Lynch.

It’s not clear in Dell’s version of events if Quattrone was involved. I reached out to him this morning and he declined to comment any further.

But here’s why it all matters: While Oracle and Dell might indeed have not been interested in Autonomy, the mere mention of meetings with Dell and Oracle to HP’s then-CEO Léo Apotheker might have had the effect of pushing up the price for Autonomy.

Think about it: Autonomy’s advisers had every motivation to do what they could to drive up the price and make the company seem as valuable as possible. The mention of a whiff of interest from Oracle and Dell, combined with rumors that were already in the water that Microsoft, too, was interested (and which goosed Autonomy’s share price), might have stirred fears of a bidding war. This might in turn have spurred HP to make the rich offer of $11 billion and change that it did. It eventually conceded that Autonomy was worth $5 billion less than it paid for it.

And that only makes Apotheker and his deal team look sillier now than they already did.

Of course, once the offer was on the table, U.K. laws made it all but impossible to walk away, even if the price seemed high after the fact. And so here we are.

Why Mike Lynch Is Playing PR Hardball With HP

Arik Hesseldahl — Wed, 28 Nov 2012 00:12:00 +0000

Why is Mike Lynch being so publicly aggressive in defending himself against Hewlett-Packard?

The founding CEO of Autonomy today lashed out in an open letter to HP’s board of directors, demanding “immediate and specific allegations” concerning financial and accounting improprieties that HP said on Nov. 20 had artificially inflated the value of the British software company by about $5 billion. HP acquired it in 2011 for about $11 billion.

Lynch insisted that even after a week of public declarations by HP on the issue, he still hasn’t been officially contacted by HP about any of it, and so can’t properly answer allegations about improper accounting and other irregularities. He also reiterated points made in numerous interviews, including one with AllThingsD, that at least some of the problems HP chalks up to accounting malfeasance can be explained away, at least in part, by differences in accounting standards that companies in the U.S. and the U.K. follow, while other problems can be tracked, he says, to HP’s own mismanagement of Autonomy after the deal closed.

There have been other stories, including one in the New York Times on Monday, and one in The Wall Street Journal today, that have added some fascinating anecdotal detail to the inner workings of the relationship between Lynch and other executives, and include some examples of the kinds of transactions that have HP accountants all up in arms.

HP’s response to Lynch’s latest public salvo was pretty straightforward: “We look forward to hearing Dr. Lynch and other former Autonomy employees answer questions under penalty of perjury,” implying, of course, that Lynch will in time be subpoenaed either as a witness or a defendant in a criminal prosecution or civil lawsuit.

At this point, one has to wonder why Lynch is fighting these claims in the media so aggressively, and not taking the expected — and indeed customary — defensive crouch behind a platoon of highly paid lawyers.

He has gone — and remained — on the offensive because, right now, HP is vulnerable, or it is at least perceived to be in a weakened state. With its shares trading close to the lowest point seen in a decade or more, sales in nearly every major business unit on the decline, and plagued by strategic misfires brought on by a succession of CEOs, it is easy to argue in public that HP is the author of its own misfortune.

Also, it doesn’t hurt Lynch that the deal for Autonomy was completed under the messy 11-month stint of former CEO Léo Apotheker, who was ultimately deemed by HP’s board to be unprepared for the task of running the world’s largest technology company. This same board — including current CEO Meg Whitman — simultaneously endorsed much of Apotheker’s vision at the same moment it decided he lacked the competence to carry it out.

Lynch’s PR strategy is simple: Muddy the waters. Charges of mismanagement coupled with anecdotal tales of jaw-dropping corporate and bureaucratic stupidity, poor business choices and differences in accounting standards may not logically add up to a $5 billion explanation. But given HP’s current state, the court of public opinion can’t help but wonder if HP isn’t trying to heap as much blame as it can for its current woes on Lynch and an overvalued Autonomy.

But imagine for a second if, in this drama, HP was replaced by IBM. Perhaps I’m wrong, but somehow I doubt Lynch would be quite so willing to fight so aggressively or so publicly without first having lawyered up. But then it wouldn’t be as interesting to write about.

(Image taken from the English children’s book and animated cartoon “Mr. Chatterbox.”)

Autonomy Founder Lynch Asks Board to Explain HP Allegations

Arik Hesseldahl — Tue, 27 Nov 2012 16:51:23 +0000

Autonomy’s founding CEO launched a new public offensive just a few minutes ago, sending an open letter to Hewlett-Packard’s board of directors seeking “immediate and specific explanations” regarding allegations of accounting improprieties that HP said it had found last week relating to the 2011 $11 billion acquisition of the British software firm.

“Having no details beyond the limited public information provided last week, and still with no further contact from you, I am writing today to ask you, the board of HP, for immediate and specific explanations for the allegations HP is making,” Lynch wrote. “HP should provide me with the interim report and any other documents which you say you have provided to the SEC and the SFO so that I can answer whatever is alleged, instead of the selective disclosure of non-material information via background discussions with the media.”

Lynch essentially repeated much of what he has already said in numerous interviews, including one with AllThingsD last week. But he also seeks an explanation as to how HP decided to write down $5 billion on the value of Autonomy, which made up the majority of the $8.8 billion write-down the company announced alongside its earnings report last week.

He also asks why HP waited six months, after first learning about the alleged improprieties, to inform shareholders.

Here’s the full text of the letter, which arrived in my inbox only moments ago:

Update: Responding to Lynch’s open letter, HP issued the following statement:

Long Before HP Deal, Autonomy's Red Flags

Ben Worthen, Paul Sonne and Justin Scheck — Tue, 27 Nov 2012 07:03:02 +0000

CAMBRIDGE, England — When Autonomy Corp. was starting up in this historic university town, founder Mike Lynch stuck a sign on an office door that read “Authorized Personnel Only.” Behind the door, he told visitors, were 500 engineers working on “hush-hush” projects.

The door, in fact, led to a broom closet, Mr. Lynch recounted in a 2010 speech. By then, Autonomy had grown from its founding in 1996 to one of Europe’s largest and fastest-growing software companies. Hewlett-Packard Co. bought it in October 2011 for more than $11 billion.

Read the rest of this post on the original site »

Autonomy Founder Lynch Blames Accounting Standards in HP Flap

Arik Hesseldahl — Fri, 23 Nov 2012 16:27:42 +0000

Mike Lynch says Hewlett-Packard has a problem with math. The founder and former CEO of the British software firm Autonomy says that at least some of the $5 billion written off by Hewlett-Packard earlier this week can be attributed to differences in international accounting standards.

In an interview with Reuters, Lynch, who was dismissed from running Autonomy by HP CEO Meg Whitman in May, says he’s gone through the books of his former firm and has found that differences between the accounting standards observed in the U.S. and in the United Kingdom can account for at least some of the differences in how things are interpreted.

Lynch made similar comments in an interview with AllThingsD Tuesday, though he hasn’t sought to put any numbers behind the contention.

Like most U.S.-based companies, HP followed GAAP, the Generally Accepted Accounting Principles put out by the U.S.-based non-profit Financial Accounting Standards Board (FASB). As a U.K. company, Autonomy had adhered instead to the International Financial Reporting Standards (IFRS) maintained by the International Accounting Standards Committee.

Lynch has maintained that differences in how revenue is recognized under the two systems leave a lot of room for interpretation in some of the matters in which he and his senior managers stand accused. One relates to licensing revenue. When a company bundles the cost of a software license, service and support into a single ongoing contract, GAAP accounting rules are more strict than IFRS rules in how the payments are accounted.

Answering one of the big accusations by HP, Lynch acknowledged that, at least some of the time, Autonomy did sell desktop machines with Autonomy software installed at a slight loss. In those cases, the customer would agree to help Autonomy market its product and, in those cases, the losses were recorded as marketing expenses. HP says that these improperly recorded hardware sales inflated Autonomy’s revenue by as much as 10 percent to 15 percent prior to its acquisition by HP.

Another difference:Cases where Autonomy would sell its software through 400 middleman companies known as Value Added Resellers (VAR), who turn around and sell the software as part of larger package deals. In Autonomy’s case, some of those VARs included both IBM and India’s Wipro. Under IFRS rules, a sale to a VAR can be booked as revenue before the resale takes place. Under GAAP, it’s not revenue to Autonomy until the resale takes place.

Lynch has also said that once HP took over at Autonomy, its own practices and bureaucracy slowed things down. Salespeople were paid commissions to sell products that compete with Autonomy, he said, but not for selling Autonomy products. On top of that, he accused HP of jacking up prices on the Autonomy software by 30 percent, driving loyal customers away.

He also said in numerous interviews that HP had “ambushed” him with all this, and that he had no idea what was coming. That’s not quite true, according to sources in HP’s camp, who say that the company had a conversation with him in mid-June, after a former member of Lynch’s senior management team is said to have come forward as a whistleblower. “He has been aware since then that we had questions about all of this,” one source told me. HP execs considered his answers to their questions to be “not satisfactory at all.”

At that point, I’m told, communications between HP and Lynch and other former Autonomy executives ended. After CEO Meg Whitman hinted, in remarks at an analysts meeting in San Francisco in October, that more restatements might be coming, certain former Autonomy executives started calling around to friends and former colleagues still working for HP, trying to find out what was coming. They had reason to expect a sizable impairment charge. What has apparently caught Lynch, et al, by surprise, is the referral to the authorities in the U.S. and the U.K. for possible criminal investigation. In the U.S., the FBI is said to be taking the lead.

One observation: Lynch tells Reuters he hasn’t yet lawyered up, which, if he hadn’t said it, would be pretty obvious anyway. Any lawyer worth their fee would have advised Lynch to stop talking publicly about all of this.

(Image of Jon Lovitz as “Master Thespian,” circa 1985. Yes, I’m dating myself.)

The Red Flags That Were Obvious -- To Some -- In the HP-Autonomy Deal

Arik Hesseldahl — Thu, 22 Nov 2012 00:27:09 +0000

The one big, glaring question that will probably never be fully answered in the still-developing HP-Autonomy scandal is this: If buying Autonomy has so obviously turned out to be a bad deal 15 months after it was first announced (and don’t forget that Autonomy’s founding CEO Mike Lynch rejects everything HP says), why weren’t there any red flags that could have warned HP before the deal was consummated?

It turns out there were, and a few smart short-sellers — the most obvious one is Jim Chanos of Kynikos Associates, who in the last 24 hours has been hailed as a bit of a god of short-selling wisdom on CNBC — who read the situation correctly and made money.

There are others who saw troubles at Autonomy that should have occurred to HP’s due diligence team. One is John Hempton, of Australia’s Bronte Capital. In a blog post this morning he sums it up this way: Good software companies tend to have low receivables and higher unearned income on their profit/loss and balance sheets. At Autonomy, it was the reverse.

Here’s a little Accounting 101: A receivable is a debt a company is owed and expects to be paid. If you buy a car from your neighbor and pay him half now and half next month, he’s counting on the fact that he’s going to be paid that other half next month. This is a receivable, and on a corporate balance sheet it goes in the assets column. This is how it tends to work for durable and tangible goods, which software is not.

Software is usually sold for cash up front, and then any further payments tend to come from either service and support on an ongoing basis or, as in the case of companies like Workday or Salesforce.com, as subscription revenue. In either case, the company selling it can’t report the ongoing payments as income because it hasn’t been paid yet, and since there are no tangible goods involved, the risk of not being paid is higher. The customer could go out of business or cancel the subscription or simply stop paying. As such, the expected future payments can’t be counted as assets, and in fact have to be accounted for as a liability, essentially money that might be lost. Sometimes they’re called “deferred revenue” or “unearned income.” Still, these numbers can and often do provide a strong indication of future revenue, which is why cloud software companies like Salesforce, Netsuite and Workday report them regularly.

So here’s how Hempton describes what he says was the most glaring problem that should have been obvious to the team at HP conducting due diligence on Autonomy:

Here’s another warning sign. I’ve talked to a few people familiar with traditional ways of valuing software companies, and they tell me that Autonomy’s operating margins, which grew from 15 percent in 2005 and surpassed 50 percent by early 2010, were too high to make sense.

Autonomy, they say, hadn’t grown to sufficient scale — at sales just shy of $1 billion with a relatively small base of customers — to make margins in the upper 40 percent range realistic or likely. Software companies increase their margins by boosting the number of customers they sell to. The more customers you have, the better to amortize your research and development costs, which are essentially the only real costs associated with creating software.

The thing is, once you make a sale, R&D costs don’t recur. The sale to the second, third, fourth and fifth customers are, aside from any marketing and costs incurred to make the sale itself, essentially pure profit. With a larger customer base, each customer accounts for a smaller and smaller sliver of the R&D cost. And once you incur the R&D cost, it’s over with. Thus, margin and revenue move together.

As one executive of a software company who didn’t want to named observed to me today: “Autonomy didn’t have the scale to achieve the margins they claimed. Once you understand that, it’s impossible to see how what HP paid made sense.” Hm.

Oracle's Ellison Vindicated in Autonomy PR Flap by HP's $8.8 Billion Writedown

Arik Hesseldahl — Wed, 21 Nov 2012 20:55:10 +0000

Asa Mathat / AllThingsD.com

Oracle CEO Larry Ellison and President Mark Hurd look pretty good right now in light of the disclosure of alleged accounting improprieties at Autonomy, the British software firm Hewlett-Packard acquired in 2011.

You may recall a brief PR kerfuffle in which Oracle disclosed that it had been approached by investment banker Frank Quattrone, who was, as some people have it, shopping Autonomy around for a possible acquisition. Some people, including Quattrone and Autonomy’s founding CEO Mike Lynch, wouldn’t call it “shopping around” because it would have been illegal to “shop around” a U.K.-based company under that country’s securities laws without disclosing the fact to shareholders. But we’re getting ahead of ourselves here.

Remember, however, that in the wake of HP’s move to acquire Autonomy, Ellison said that at something north of $11 billion, HP had paid an “absurdly high” price, and cattily followed that by saying that Oracle had “taken a pass” on Autonomy.

Lynch, in an interview with The Wall Street Journal days later, said that no such overtures to Oracle had ever been made.

Oracle, just to set the record straight, mind you, with absolutely no other agenda in mind, fired back that Lynch apparently had a bad memory and had forgotten about a meeting, indeed a pair of meetings, involving Hurd, Lynch and Quattrone and some PowerPoint slides.

“Oh, you mean those slides,” Lynch said. No, he didn’t really say that, but he might have. Anyway, at that point, Lynch clarified that he had indeed accepted an offer to meet Hurd to talk about database technologies but he was “not there to sell anything.” Okay, then.

Again, just to clarify the record and nothing else, Oracle dug through its files and found the PowerPoint slides from at least two meetings that Lynch and Quattrone had held with Hurd. Quattrone owned up that the slides were his and that the idea had been to pitch Autonomy to Oracle independently of Lynch or Autonomy “as an idea.”

Autonomy had already been the subject of repeated rumors about a nonexistent bidding war for the company that had Oracle and Microsoft wrestling over it. And the meetings at Oracle took place in early 2011 after those rumors had been in the water a little while.

So yesterday’s disclosures by HP certainly put an exclamation mark on a back-and-forth between Oracle and Lynch that had simply quieted but not concluded.

Which brings us to those slides. What’s in them? Some interesting nuggets for sure, but there are no smoking guns concerning Autonomy’s alleged cooking of the books prior to HP’s announcement that it would acquire the software firm on Aug. 18, 2011.

On one slide we see Autonomy’s revenue mix as of early 2010. (Click to make bigger.) Note that the IDOL Product that makes up the blue slice of 29 percent of sales is the “hardware product” that in HP’s telling is the one sold either at a low margin or at a loss in some cases. Those allegedly improper bookings, HP says, amounted to 10 percent to 15 percent of Autonomy’s overall sales, and would otherwise be about half the size shown here.

In another slide we see Autonomy’s revenue and enterprise value as of January 24, 2011 — less than six months before HP’s acquisition — converted to U.S. dollars and compared against other notable software companies. Autonomy is valued at about $5.7 billion, or a little less than six times revenue. Six months later HP would pay nearly twice a much, which struck pretty much anyone paying attention as odd if only for the timing of the deal. Now HP says it paid about $5 billion too much for Autonomy and that amount lines up almost exactly with the increase in Autonomy’s valuation from this point. Coincidence? Maybe. But, interesting! (Click to see it bigger.)

And here we see a list of names of both Autonomy senior executives and members of its board of directors. As yet there’s no indication who it was from within the ranks of Autonomy who came forward to HP after Lynch’s dismissal from HP by CEO Meg Whitman, and so there’s no way to know if this person’s name appears here. Also, Autonomy’s former directors will almost certainly be contacted by both the U.S. Securities and Exchange Commission and the U.K.’s Serious Fraud Office. (Click to see it bigger.)

If you want to read those slides in their entirety yourself, here they are, via Scribd.

Autonomy Presentation 1 503341

Autonomy Presentation 2 503342

Autonomy Founder Mike Lynch Rejects HP Charges, Alleges Mismanagement

Arik Hesseldahl — Tue, 20 Nov 2012 18:50:55 +0000

I just got off the phone with Mike Lynch, the founding CEO of Autonomy. As you might expect, he has a different view of events surrounding the allegations leveled by Hewlett-Packard today concerning Autonomy’s role in an $8.8 billion write-down.

Calling from the U.K., Lynch said that he had been “ambushed” by HP’s accusations, and that he hasn’t been contacted in any official capacity by HP, its lawyers or anyone else; the first he heard about the accusations against Autonomy management was via the press release.

He went on to accuse HP of mismanaging Autonomy and essentially sabotaging its performance after the $11.7 billion acquisition closed. He said that once Autonomy was in the HP tent, HP managers arbitrarily added a 30 percent markup on Autonomy software, which had the effect of driving some longtime customers away. In other cases, Lynch said, HP salespeople were paid commissions to sell third-party products that competed with Autonomy, but no commissions to sell Autonomy products.

Below is a transcript of our conversation:

AllThingsD: Mike, thanks for the call. I presume you have a different view of events concerning the accusations leveled by HP against your former company, Autonomy.

Lynch: Basically, we reject completely the assertion of HP. It’s completely wrong. The reality of the situation is that when HP bought Autonomy it had hundreds of people involved in due diligence, which was described at the time as “meticulous.” And KPMG, Barclays and Perello were all involved there. And they’ve actually run it for a year. To somehow admit a $9 billion elephant in the room just beggars belief, frankly.

What do you think of the specifics of the allegations? There were hardware sales, sales of software to value-added resellers, and some concerning some subscription revenue that was booked incorrectly. Can you address any of the specifics?

I don’t know any of the specifics because no one has been in touch with us. We’ve not heard anything from any partner other than what’s been in the press release. It’s been a bit of an ambush. I don’t know what she’s referring to or why. Obviously, there are differences between IFRS [International Financial Reporting Standards] accounting and the U.S. GAAP system, but the fact is that all our financial information was given to Deloitte, which, unlike most European accounting firms, audited us every quarter. And consequently we’re confident in the numbers being right.

Do you anticipate being sued personally by HP, or investigated criminally in this matter? Have you retained counsel?

As I said, I’ve heard nothing from anyone, not even from HP. You’re the first person that has mentioned these to me. I completely and absolutely reject the suggestions. So let’s see some evidence and we’ll explain it from there. All we’ve done is gotten a press release. There haven’t been any of the lawyer letters that one might expect in a matter such as this.

The sad thing about this is that it’s a distraction. Having been on HP’s Executive Council, I walked into a company that was riddled with internecine warfare, and obviously Léo Apotheker and Shane Robison [HP's former chief strategy officer] had a strategy, which was about taking down certain parts of the business and divesting them. And obviously there was another one of those Hewlett-Packard coup d’etats. And Léo and Shane were out, and the other divisions became more powerful, and we obviously had a very hard time inside HP.

What you saw was a situation where hundreds of the Autonomy staff left — remember, it was a pretty small company with a small staff — they all left, and the senior management team left. There was significant mismanagement of the asset. So the quarter when the numbers at Autonomy went south was the quarter that HP took over and took over the sales process.

They did things like, if the customer had an enterprise sales agreement with Autonomy, they could no longer buy through Autonomy, they had to buy through HP’s Enterprise Services Group. And ES insisted on putting a 30 percent markup on the software. So, suddenly, established customers had to pay 30 percent more for that software. And that is just one of a long list of examples.

If an HP salesperson sold a competitive product, they got a commission. If they sold Autonomy, they didn’t. These are the kinds of internal issues that went on and greatly damaged the Autonomy business and led to a great number of the Autonomy staff leaving. Since the management team has left, it’s sad to see that the company’s prospects have deteriorated. And I guess that is what is behind this write-off.

It sounds like much of this goes back to the fundamental question of Léo Apotheker’s strategy. He wanted to move HP toward high-margin businesses like software and get out of low-margin hardware like PCs and printers.

There was a strategy which the board of directors had authorized Léo and Shane to carry out, and acquiring Autonomy was a key part of that decision. When they were ousted, the decision to divest the hardware business was reversed, and you had a very messy strategic situation.

Then it really comes down to questions of accounting, and you think it can all be properly explained.

If we are given the chance to explain it, it can all be properly explained. You will see that all the information was given to our auditors, who made the correct decisions under IFRS, I have no doubt.

Meg was on CNBC and on conference calls today, laying much of this at your door, if not directly, then by inference, reminding people that she let you go after Autonomy failed to make its numbers, and so forth. We’ve never heard the other side of that conversation. Can you give any insight into it?

Sadly, when these things happen one gets gagged. The reason why those numbers were low in that quarter was because of the switchover to HP managing the sales process. As I said, arbitrary markups were added on, and commissions were given to people to sell against Autonomy. And Autonomy deals were wrapped up into packages, which means that the normal course of selling software at the end of the quarter was defeated. So this is just an example of what went on, and what we’re really talking about is a company not understanding the software business. And not understanding an acquisition. I’m afraid it’s an ongoing situation. You saw it with Palm and with EDS. And the important thing about Autonomy is that it has a great history. Obviously, for the first two quarters the business was fine within HP until these management changes were put in place. There were silly things like divisions of HP refusing to sell Autonomy because it hadn’t been certified by them. This kind of internal bureaucracy and infighting going on there led to the staff leaving. Autonomy is the kind of company where the staff is really vital, and there were hundreds lost during that spring period. And then most of the senior management team left. By then, the company was so damaged, to the point where the numbers are not going to continue on the line that you would like them to.

HP says it was a member of your senior management team who came forward with these allegations. Do you know who that is, and can you name them?

No. Again, I have no idea what they’re talking about. I don’t believe any of the senior people are still there. So I’m afraid I’m in the dark.

Is it possible, then, from your point of view, that HP is trying to take a big charge, recalibrate its financial position and simply lay as much of the blame as possible on Autonomy?

I think the reality is that the business has not been managed in the last year. It’s not inconceivable that the business has gone down in value. The question here is about the amount. I suspect that every spare cent has been thrown into this write-down. Meg has spent the day talking about this, more than she has about delivering the worst results in HP’s 70-year history. HP needs to think more about the fundamental problems of its business. I hope they can rebuild what was once a great Silicon Valley company.

What Exactly Happened at Autonomy?

Arik Hesseldahl — Tue, 20 Nov 2012 16:11:09 +0000

Today’s bombshell from Hewlett-Packard concerning an $8.8 billion write-down related to Autonomy, the British software firm it acquired in 2011 for $11.7 billion in combined cash and assumed debt, is a little hard to understand. Here’s how it breaks down:

First, HP’s total $8.8 billion write-down isn’t all Autonomy-related. Of that total amount, about $5 billion relates specifically to Autonomy. Moments ago, on a conference call with reporters, HP CFO Cathie Lesjak said that the rest stems from the drop in HP’s share price.

The core allegation is that people at Autonomy took certain accounting actions while still running Autonomy as a publicly held company in the U.K., which had the end effect of making Autonomy seem more valuable than it was. As CEO Meg Whitman put it on a conference call a few minutes ago: “There appears to have been a wilfull effort on the part of certain former Autonomy employees to inflate the underlying financials of the company in order to mislead investors and potential buyers.”

It’s important to note that Autonomy’s founder and former CEO Mike Lynch has just issued a statement, essentially denying HP’s claims. I heard portions of the statement read on CNBC. In a statement being reported by Reuters, he has “flatly rejected” HP’s allegations. Also: “HP’s due diligence review was intensive, overseen on behalf of HP by KPMG, Barclays and Perella Weinberg. HP’s senior management has also been closely involved with running Autonomy for the past year.”

So what is alleged to have happened? For one thing, Autonomy, as HP tells it, was selling some hardware at a loss. During a period of about eight quarters prior to HP’s acquisition, Autonomy sold some hardware products that had a very low margin or on which it may have even taken a loss. It then allegedly turned around and booked those hardware sales as high-margin software sales. At least some portion of the cost on these products, Whitman said, was booked as a marketing expense, not as cost of goods sold.

There’s a second piece of the puzzle, where HP says that Autonomy was selling software to value-added resellers — the middlemen in so many technology transactions — in which there are ultimately no end users. That, too, inflated apparent revenue.

Third, there were some long-term hosting deals — essentially, Autonomy hosting applications for its customers on a subscription basis — that were converted to short-term licensing deals. Future revenue for software subscriptions — that should have been deferred or recorded as coming in the future but not yet booked — were stripped out and booked all at once.

John Schultz, HP’s general counsel, said there appeared to be what he called “a conscious effort by some former Autonomy employees to portray it as a pure software company.” The low-margin or loss-making hardware sales in particular, he said on the conference call, amounted to as much as 10 percent to 15 percent of Autonomy’s revenue during the eight-quarter period in question.

It had the effect, Schultz said, of not only closing the gap between actual financial growth and the consensus expectation of analysts — meeting the consensus is always a concern at a publicly held company — but also inflated the “growth metrics” of the company. “From an accounting perspective, there were improprieties, but also there were severe disclosure failures,” he said.

Lesjak said the problems are not only with the fact that revenue was inflated by itself, but the kinds of revenue. “These hardware sales were frequently reported as licenses. The VAR sales were reported as licenses, and they weren’t, in some sense, real sales, because there was no end user.”

The result, Lesjak said, was that Autonomy was able to boost its gross margins, a key measurement of profitability. Where Autonomy had been reporting gross margins in the neighborhood of 40 percent to 45 percent, Lesjak said a more realistic gross margin at Autonomy going forward is in the 28 percent to 30 percent range.

So what is HP going to do about it? First, it has reported the matter to the enforcement division of the U.S. Securities and Exchange Commission, and to the Serious Fraud Office in the U.K. Once those authorities have their say, HP will likely sue someone. Whitman conceded that it will likely take years before it’s all done. It’s going to get ugly before it’s over.

The Wall Street Journal just got a statement from former HP CEO Léo Apotheker, who did the Autonomy deal during his 11-month tenure as CEO. In a word, he says he’s “stunned.” He will also make himself available to help HP get to the bottom of it all.

Whitman was just on CNBC for several minutes, going through the particulars and reiterating much of what she said on the conference call with reporters. Here’s the video:

Eight Questions for Hewlett-Packard Software Head George Kadifa

Arik Hesseldahl — Tue, 25 Sep 2012 14:48:17 +0000

It wasn’t so long ago that Hewlett-Packard looked like a hardware company transforming itself into a software company. Until former CEO Léo Apotheker was fired by the company’s board of directors and replaced with current CEO Meg Whitman, the official line at HP was that the way out of its troubles was to divest itself of things like PCs and invest heavily in software.

One expression of that strategy — and a controversial one at that — was the nearly $12 billion acquisition of the British software firm Autonomy, announced 13 months ago. HP ultimately didn’t spin off its PC business, but its acquisition of Autonomy stuck. Now it is firmly part of HP’s software business.

As CEO Meg Whitman struggles to turn HP around, software is still a key part of her plans. While Whitman has made no secret of her opinion that Autonomy needs attention, there are some solid bits of HP’s software business — like Vertica and ArcSight — that are showing significant promise, if only they could grow.

Finding a way to get them growing is the job of George Kadifa. In June, HP named him as executive vice president, head of the company’s software business and a member of its executive council. Kadifa knows a bit about the software business. He spent seven years as a senior vice president at Oracle, and then ran his own company, Corio, for six years, until it was acquired by IBM for $182 million in 2005. From there, he went to investment firm Silver Lake, where, as partner, he pushed portfolio companies to improve their operations.

Kadifa sat down with AllThingsD last week at the software unit’s new headquarters in Sunnyvale, Calif., for his first interview since joining HP. We talked about how he plans to fix its weaknesses, improve its strengths and make software a more sizable piece of HP’s overall business.

AllThingsD: George, you joined HP to head up its software business unit in June. You’ve reached the 100-day mark, so give us your assessment of where you see things now and where they’re going.

Kadifa: A lot of good things are happening. We’re at about $4 billion in revenue, so if you look at HP Software as its own business, we’re about the fifth- or sixth-largest software business in the world. We have a great customer base; having worked at IBM and Oracle and now HP, customers really like us, versus previous experience. And we have a lot of products. A lot of them we acquired rather than built in-house.

Among the recent acquisitions, Vertica is one where the consensus seems to be that it was a pretty good deal. Where do you see Vertica going in particular, and what sets it apart?

One is the technology, which we think is second to none. When you think about it, the idea of taking data in columns and then arranging it in a row fashion, it seems like sort of a trivial difference. But it’s really unbelievable what it gives you in terms of capabilities. Say you’re storing a thousand names, you’ve got first names and last names. Let’s say five of those guys are named Arik. Normally you’d store five Ariks in a column. But here, instead of listing the name five times, you make a note above it with a five, so you know the name occurs five times. Now when you search through that list it’s so much more efficient, it’s two or three orders of magnitude faster, which means it’s 100 to 1,000 times faster than classic relationional technology. It has turned out to be a real diamond for us.

Yet it’s a small diamond. Yes, it’s growing, but how do you get it to grow fast enough that it becomes a more meaningful part of HP?

It’s a fair question. What we started with was a business with revenue in the low millions. It wasn’t in the $100 million range in revenue. It was really a project with some customers. We took it, and now it’s in the middle-double-digit millions. I can see us getting to $100 million with Vertica in a very short period of time. And there’s no reason it can’t be a billion-dollar business.

Let’s wrestle with the situation at Autonomy a little. You just named Robert Youngjohns to run it. Unlike Vertica, the consensus here is that Autonomy was an expensive deal that hasn’t come close to meeting expectations yet. What do you see happening there?

We just had a two-day planning meeting with everyone from Autonomy, where we went through the current status and looked at where we’re heading. The key for us right now is to get fiscal year 2013 on track, and that starts Nov. 1, so we’re working on that right now. Basically, when you look at Autonomy, the core unit is the IDOL Engine, which is the unique capability of meaning-based computing. We’re going to double down on that. In our labs in Cambridge, England, we have 40 or 50 mathematicians writing algorithms. And we’re going to build a team here in the U.S. to productize it and create a platform around it, because it has that potential. Frankly, the way Autonomy was managed previously, they put a lot more emphasis into enabling applications, which was fine, but our belief is that there’s a broad agenda, which is creating a platform around meaning-based computing. So we will maintain those apps, but at the same time we’ll open up the capabilities to a broader set of players outside HP.

It sounds like what Autonomy was doing was growing by acquisitions and then creating a more vertical stack of applications prior to HP’s ownership, rather than taking a broader, more horizontal approach. It sounds to me like HP wants to make Autonomy more horizontal. Is the potential there?

You’re correct. And, yes, the potential is there. I asked Autonomy that very question about why they went vertical instead of horizontal, and the answer that I got was that it came down to a difference of culture between the U.S. and Europe. In Europe, they tend to make things complex in order to create more value. For example, they saw the IDOL engine as too complex to just give it to people. Instead they thought they should acquire vendors and then create value by enabling applications. Here we take something that’s complex and we ask how we might simplify it in order to give it more scale for a bigger market. So, some of that difference was cultural, and some of it was that I think they fell in love with these acquisitions. … We think Autonomy’s technology has broader implications. And to reach that potential, we have to open it up as much as possible. And we’re also working with other organizations inside HP — PCs, printers, servers — to basically produce additional synergies.

Are the teams ready and primed? Meg Whitman, your CEO, and CFO Cathie Lesjak have made no secret that, so far, they have seen Autonomy’s ability to respond to deals that had been teed up by HP as lacking. Is the structure in place to address that problem?

It’s not in place yet, but the situation has settled down somewhat. The processes are working. The reason is that initially we kind of left Autonomy alone, and then we tossed a bunch of deals at Autonomy. The initial plan was to keep it intact, have the HP salesforce bring in deals, and everyone would be happy. One problem is that there were too many deals, and second is that the deals weren’t well-qualified. So what we did next was put in place a management process around sales cycles at Autonomy.

There’s been a lot of turnover there. Obviously, the former CEO, Mike Lynch, left, but so did a lot of the people who worked with him. Does that hurt the institutional memory at all?

No. Basically we lost the top half-dozen people. And you always expect that with an acquisition, especially with people who have grown up as entrepreneurs and will always be entrepreneurs. The remaining people running the products lines are still around, and so is the salesforce. The development guys in Cambridge and Chicago are still there.

Michael Dell has basically said he intends to keep growing his company by acquisition. Your boss, Meg, has said that we can expect no major acquisitions for the forseeable future — at least until the balance sheet is in better shape. If there were going to be acquisitions, even small ones, I would imagine they’d more likely be in software. Is that a fair statement?

I don’t want to say anything on Meg’s behalf. From a software point of view, if there are tuck-in acquisitions that can help us develop our technology, I’ll go and request to do it. The cash we generate from software would cover us. So that’s the thinking right now. We need to learn as a business how to grow organically because that’s where all the value is. At Silver Lake we did analysis on companies that grew by acquisition: Oracle, SAP, Microsoft, IBM, EMC and others. You find that their revenues grow and their profits grow. But what doesn’t grow, and what actually shrank from 2006 to 2011, is their multiples. Their valuations multiples shrank. What the market is saying is that just making acquisitions doesn’t add any value unless they create organic growth. That is how we look at it here. We’ve done a ton of acquisitions, so the task now is to create more organic growth because that is what the market will value.

Search Under Way at HP for Autonomy's Next Chief

Arik Hesseldahl — Wed, 20 Jun 2012 21:12:29 +0000

The search is on at Hewlett-Packard for an executive to run Autonomy, the former British software firm for which HP paid $12 billion in combined cash and debt last year.

While there’s no word on who’s on the short list — I’m told the process is just getting under way — candidates from both inside and outside of HP are being considered.

Since the acquisition closed in October, Autonomy has so far turned out to be something of a disappointment, despite all the pronouncements that it represented an important opportunity for HP to diversify into software. During a conference call with analysts on May 24 and in a subsequent interview with AllThingsD, CEO Meg Whitman said that the team at Autonomy seemed to have trouble closing the deals that HP’s sales team would tee up. It reported “disappointing results” that hurt HP’s overall results, Whitman said, thus prompting the surprise departure of Autonomy’s founding CEO Mike Lynch. Since then, Autonomy has been been under HP’s chief strategy officer Bill Veghte.

Autonomy’s integration into HP is the last lingering bit of messy business left over from the memorable day of Aug. 18, 2011. That was the day that former CEO Léo Apotheker announced plans to spin off the PC business, acquire Autonomy, and then tied those two big strategic moves with a bow of a nasty earnings miss. Thirty-four days later, in no small part because of perceptions that he had overpaid for Autonomy, Apotheker was out of a job, and Whitman was his replacement.

Lynch, who personally banked $800 million on the sale, once publicly compared the relationship of Autonomy to HP to that of a cub and a “mother tiger.” Initially granted a lot of autonomy from the home office — no pun intended — its lean culture proved early on to be a poor fit within HP, according to a report in the U.K.’s Guardian. Soon after the deal closed last October, Autonomy’s heads of finance, marketing and of several sales teams bolted for the exits, and were said to be unhappy with what they saw as HP’s bureaucratic tendencies.

But Autonomy’s culture leaves a lot to be desired — at least in the eyes of people who work there. As Wired noted last month, its rating on Glassdoor.com, a site where employees rate a company based on work environment, is about as low as can be. Whoever gets the nod will have their work cut out for them on the employee morale and corporate culture fronts, plus the pressure will be on early and often to close deals.

Hewlett-Packard CEO Meg Whitman Has a Lot to Say (Interview)

Arik Hesseldahl — Wed, 06 Jun 2012 02:56:09 +0000

Today I had my first in-person sit-down interview with Hewlett-Packard CEO Meg Whitman. Over the course of 30 minutes we talked about a lot of things, and quite frankly she had a lot to say.

For one thing: Once the legal trial with Oracle is concluded, one way or the other, she’d like to see HP and Oracle work together again, even though she conceded that the damage done to HP’s Business Critical Server business is hurting HP. She also said that HP will create a version of HP-UX, its version of Unix that will run on Intel’s mainstream server chip known as Xeon.

For another, she will not accept a job in a Mitt Romney White House in the event one might be offered. To do so would be to leave HP too soon at a moment when, more than anything, it needs consistent leadership.

Additionally, she doesn’t see a scenario where HP would spin off any piece of its operations, because in her mind they all fit together.

Below is a transcript of our conversation in its entirety. And while I realize it’s a long read, I thought it was important to let Whitman address every question I had for her completely. As you will see, we covered a lot of territory, because, well, there’s just so much territory to cover.

AllThingsD: Today’s message was long on what HP is about and less about specifics. There was the new marketing slogan “Make it Matter.” Hearkening back to your days running consumer branding for Procter and Gamble, can you walk me through what you think the new message means?

Whitman: When I came to HP, I was remarkably impressed with the assets that it has, and the people who are here. The crown jewel of the company is its people — it’s remarkable — and what they have lived through would have created far more disruption at other companies. As I began to understand HP, I said that it hasn’t been very good at telling its own story. Every CIO I talked to today — and I have a room full of 160 CIOs over there — when they walked through the showroom floor after today’s keynote, said they had no idea as to the breadth and depth of everything that HP does. And these are our best customers and they did not know. So I thought we needed to tell our story better. And when you start a marketing campaign, you always start with the authentic truth about the company because you have to be able to say something that no one else can say and that’s authentic about the company. So we got the 50 marketing executives in a room and started to think through what is unique and different about the company and we came very quickly to “Make it Matter.” Because in fact what we do makes it matter. It matters to the International Space Station or the Department of Works and Pensions or the U.S. Navy or Alianz or Deutsche Bank or Facebook. It matters what we do. Our people take great pride in that. And it’s also true that HP will do anything for its customers. If you get into trouble, we will darken the skies. That seemed to be the authentic thing that we could say.

And how will we be seeing this message in HP marketing?

All the business units will tuck under that messaging. So you will see it around PCs and printers, and in servers and storage and networking, in the storage business. Sometimes it will be digital, sometimes it will be print, sometimes in social media, sometimes on TV. Corporate wide, everyone will tuck under that message.

Does the HP brand need major rehabilitation and repair or more of a polishing?

I think we need to tell people what we do, so I think that’s more of a polishing, to tell people what we do. In my view we just need to tell people who we are, what we do and the value that we bring. And I think the other thing about HP is that this is not about the network or the database. It’s about our customer. This is something that I bring to HP, because I’m not an enterprise salesperson. At eBay I was a customer, and so, I think we can be completely differentiated by saying it’s not our agenda, but your agenda. And I think that’s very authentic to HP.

Let’s talk about the restructuring process that you announced during the last earnings call. You said on CNBC the next day that you thought the restructuring process was by that point about 10 to 15 percent complete. You announced that you’re going to cut about 27,000 jobs, so then I wonder what you think is the next big step in that process? What’s the next big hurdle that gets you to, say, 20 or 25 percent complete?

I would say this is a journey of decisions that need to be made and of strategies that need to be laid out. If you go back to when I took over, I made the decision about the PC business, I made the decision about WebOS. I recognized that we needed a strategic realignment to remove complexity from the business, so I combined PCs and printing under Todd Bradley, moved the Global Accounts sales force to Dave Donatelli, combined our sales organizations — we had two huge sales organizations under John Hinshaw — and then unified marketing and communications, all with the objective of making it easier to sell, easier to buy from us, and easier to get work done at HP. Then we all recognized that we needed to have the financial capacity to invest in the business. The way we were headed it was not going to happen, it was unsustainable. And we have a cost structure that we can no longer afford, so we took the very tough step of addressing how we can do things more effectively. And it’s never easy to reduce the workforce by 27,000 because it disrupts peoples lives. But in my view we couldn’t afford to wait to make the needed investments to set HP up for the next five years.

Is cutting 8 percent enough? Some thought the cut wasn’t large enough.

I think it’s about the right size. You never know for sure, but we’re taking the very best analysis that we can. I will say something about HP: When this company set its mind to something it brings to bear deep analytics, and so when you know what you’re doing you know why because they just get after it in a very deep analytical way. When we weighed the PC spinoff, we spent 30 days on it, and it was like, ‘alrighty, then.’ And this was the same in many ways. Once we knew, we decided to go forward thoughtfully. So we’re also tacking cost structures around supply chain and SKU reduction, and simplifying the overall organizations. So I think you’ll see us execute against this for awhile. We’ve got to deliver the savings, we’ve got to restructure some of our business processes and we’ve got to make it easier to do business with us. So now we’ve got a strategy, we’ve got the mechanism. Now we’ve got to execute.

Execution is a word I often hear described as a specialty of yours. What do you do to get people to execute?

I think you get results from what you measure, so what I measure is really important. At a company this big you have to have a cadence around that measurement and around the dialogue with your business units. It starts with my executive team. And I think I have the right people on the right jobs at the right time. And now it’s a matter of holding ourselves accountable. And that doesn’t mean there won’t be challenges and problems, but once you’ve identified the problems and a way to fix them you have to measure the progress. This was something I learned very early and was a hallmark of how I ran eBay and how I think I did well at P&G and Disney. But at the same time, you have to identify the pockets of creativity and where to invest, and that’s just as important as how you capture value. Once you save all that money the question is what do you do with it? We better make sure we put it in initiatives that have a high return on invested capital. You can’t do everything, and you can’t give everyone a little. You have to give a small number of people a lot.

So, about the investments you’re going to make. You talk often about a renewed focus on services. This question comes from a former HP employee. You said today in your keynote remarks that about 70 percent of HP’s sales come from infrastructure or what I would call hardware. And yet you talk often about services. Given those two choices, which do you think is more likely to save HP? Selling more boxes and things or selling more services?

Let me reframe it for you. It’s about optimizing our existing set of businesses to perform as best as they possibly can. They’re not. Revenues are down 7 percent and earnings are down 21 percent year on year so we have to get our core businesses, all of them, optimized and functioning really well. And then we have to position ourselves to take advantage of the bigger changes in the technology industry. I’m a big believer in focus. So as we thought about the pan-HP initiatives we might have picked, we went with cloud, security and information optimization. There were others we might have picked. But I thought about what we do well, what we already have, and what we can deploy against some of these bigger shifts in the industry.

So on focus — I’m wondering about the similarities and differences of what IBM went through. It spun off several things like PCs and printing and hard drives. And yes, the circumstances are very different and yet there’s some thematic similarities. When the PSG spinoff idea was floated, it was immediately compared to IBM. Do you envision getting rid of any peice of HP or do you plan to keep the whole thing? Are there some peices that are not core?

No. As I see it, everything stays. Each of the pieces fit together. They are very big and significant businesses in their own right. The PC business is at $40 billion and number one in the world. Not long on operating margins but because of the way its engineered, it has almost an infinite return on invested capital. You gotta love that business.

Let’s talk about two messy pieces of business, if you don’t mind. First is Autonomy. It’s the one thing that’s still lingering from all the announcements of last Aug. 18. The former CEO Mike Lynch is leaving HP. You’ve said that company delivered some disappointing results. What happened there and what does success at Autonomy look like in your mind?

In my view, this is the classic case of scaling a business from start-up to grownup. Going through that barrier of a billion dollars in sales is not easy because you can’t run the organization at $1.5 billion the same way you did at $500 million. You just can’t. And for many entrepreneurs, processes and discipline are dirty words, and you have to have those things, especially within the context of HP. I know exactly how this world [works]. My view was that we needed to make a change to someone who can take Autonomy to the next level. I have every confidence that Autonomy will be a very big and very profitable business. It’s taking advantage of a big shift in the industry toward big data and unstructured data. But we needed different leadership to age Autonomy, and by that I mean age it kind of like wine.

And so you added Autonomy to Bill Veghte’s responsibilities.

Yes, it’s going to be Bill for now and ultimately it may end up back in the software business, but I need full-scale attention on this by someone who has a lot of experience. We’ll figure out later if its permanent or not, but right now he’s the guy.

What does success look like at Autonomy?

I think it needs to grow rapidly. I think this is a very rapidly growing market. We need to continue to lead it. The good news is that I don’t see a competitve disruptor in the marketplace. So I think we have a good opportunity. But I also want to make sure that it gets integrated into the rest of HP in a good way. So we’ve started adding Autonomy into document workflow in our printers. And I want to think through all the different ways that Autonomy can be useful to the rest of HP, and we’re just starting to think about that.

The problem I think you said was that there was some difficulty closing deals at Autonomy that HP had teed up?

It’s classic. HP fed Autonomy a huge number of deals. But Autonomy didn’t have a system for accepting those deals, and closing them. And understand, when you’re working with big companies, there’s processes. When you sell with Enterprise services, there are steps you need to go through. When you sell with Dave Donatelli, there are some steps you need to go through. So that was the biggest challenge.

Asa Mathat / AllThingsD.com

So the other messy piece of business is the dispute with Oracle over Itanium. Larry Ellison said at D: All Things Digital last week that he likes you, yet your companies are in an ugly legal fight right now. I asked Dave Donatelli yesterday if he thought that HP can reverse the downward sales trend in the Business Critical Server business. He seemed to think it’s possible and that winning the lawsuit will make it easier. But it’s hard to look at the declines in BCS sales and wonder if you can reverse the trends even if you win. What do you think?

That was nice of Larry. There’s no question that the BCS business has been hurt by this. You can see it in the results. It was growing by 10 percent before Oracle refused to port and now its declining by between 20 and 30 percent a year. This has been very tough for HP and very tough for Dave Donatelli’s business. In the end, if we win the lawsuit we will continue to protect our customers interests. The reason we went to the mat with Oracle on this was because we have a lot of customers on Oracle Itanium who do not want to switch, do not want to get off of HP Unix and on to something else. And they kinda like what they have and they’d like to stick with it. I think either way, Dave’s got in the works the next generation of Business Critical Servers on a more open platform. It’s called Odyssey, which is pretty cool. Ultimately we’ve got to build Unix on a Xeon chip, and so we will do that. I don’t have a lot of animus toward Oracle, and historically ours has been one of the great partnerships in IT history. I have a lot of respect for Oracle and when we’re through this court trial I would like to see us work together again.

Has anyone sought to call Ellison or Safra Catz and try to sort it out?

There has been a lot of back and forth, some of it before I came on board. It’s a very rapidly changing industry. I’d like to believe that once we get this behind us we can work together again.

You don’t think the damage to BCS is permanent?

It’s not been a good thing for the business. Let’s be very clear about that. This has not been good for HP. In the end it’s all about our customers, and it’s not been good for them.

Let’s talk again about SKU reduction, which is a favorite subject of mine. How might it become apparent to customers? What does it mean to you?

Reducing complexity, improving quality, reducing inventory, and better meeting customer needs. Somehow this company got into the habit of adding more and more options for more and more people, which on the surface is good, but when you examine the law of unintended consequences it’s not good for the company and it’s not good for the customers. The more platforms you develop to, the more SKUs you have, the more complicated it is, and there’s a higher chance of quality problems slipping in. And so everyone in the company is in agreement with this part of the strategy. I think you will see a smaller number of products tailored to specific market segments where we can get real supply chain leverage, real inventory leverage and real parts leverage. You forget about all the spare parts we have to carry on the inventory. I think this is a big part about how we deliver better quality at lower cost and deliver real benefits to customers.

You’ve been on the job eight months. No one really brings up the question of succession, you have deep management bench, but — knock on wood — if you get hit by a bus tomorrow, who’s in charge?

The board takes this sort of thing very seriously. We have a succession plan in place for all my senior execs, including me. I’m not going to give you any details about it, but that was a good try.

Mitt Romney has said that he thinks you should have been elected Governor of California, and so the fact that he’s talking about you makes me wonder, if he wins in November, if you might find yourself offered a job in a Romney White House.

He might call me, but categorically I would not accept. This is a decision I had to make before accepting the job to run HP. You can’t land at a company like HP, that has gone through what it has gone through, and think that you’re only going to stay 18 months.

Even if he offered you a spot on the as his vice-presidential running mate? Not that anyone is talking about that.

Categorically no. HP needs consistent leadership more than anything else. And my view I will stay as long as the board would like me to stay. It would be completely the wrong thing to do to leave HP right now. And by the way? I love it.

The Aircraft Carrier Hewlett-Packard Begins Its Turn (Video)

Arik Hesseldahl — Thu, 24 May 2012 15:55:21 +0000

Shares of Hewlett-Packard are heading up this morning on the heels of yesterday’s chock-full report, which included earnings that beat expectations and details of a restructuring plan that will see the company slash about 27,000 jobs over two years.

HP shares rose nearly 5 percent to $22.10, up $1.02 as of 11:15 am ET. Investors appear to be showing new confidence in HP and how CEO Meg Whitman is running the show. All the announcements that HP made yesterday bear repeating, because it was a busy afternoon:

The company says it plans to eliminate 27,000 jobs — about 8 percent of its work force — over two years, as part of a restructuring plan it says will help save between $3 billion and $3.5 billion in annual operating costs. The savings will be reinvested in growth areas of the IT business like cloud computing and services, and in a renewed focus on research and development. About 9,000 — or roughly a third — of the cuts will occur this year. Another batch — AllThingsD has been told the number is about 5,000 — will occur by way of voluntary retirement packages offered in the U.S.

HP reported quarterly earnings that beat the street’s expectations. While profits fell year on year by more than 30 percent, non-GAAP per-share earnings at 98 cents beat the 91-cent consensus handily. Sales also came in ahead of expectations at $30.7 billion and beat the consensus by $800 million — though that, too, was a decline of 3 percent. It was the third quarter in a row that HP has recorded year-on-year sales declines.

Mike Lynch, head of Autonomy, the British company for which HP paid nearly $12 billion last year, is leaving the company. Whitman talked about “disappointing results” at that unit, and complained in an appearance on CNBC this morning that Autonomy’s team was unable to close deals that HP had brought to the unit. Lynch, you’ll recall, is Autonomy’s founder, and was present at a pair of disputed meetings with senior executives of Oracle, at which the company may or may not have been shopping itself. Or just talking about databases in a lively fashion.

Here’s an interesting detail: HP is evaluating the carrying value of the Compaq brand name. Remember, of course, that HP acquired the PC maker Compaq way back in 2002. That deal ultimately made HP the PC-making powerhouse that it is today, but also had a lot to do with the downfall of Carly Fiorina, the company’s CEO from 1999 until 2005. The plan is to use the Compaq brand in a “more targeted” manner, CFO Cathie Lesjak said, and so HP will take a $1.2 billion impairment charge to write down the value of the name. One wonders if the letter Q might eventually come out of the ticker symbol “HPQ” on the New York Stock Exchange, and that it might revert back to the old ~~“HP”~~ “HWP” from before the 2002 acquisition.

Update: A few readers have written to point out I was wrong about HP’s old ticker symbol. It wasn’t HP but HWP. Silly me. Even so, if the Compaq name is headed for some lesser level of importance in HP’s future, then perhaps the Q in the ticker symbol, which was added as a nod to Compaq’s old symbol CPQ, to give the impression that the combination was more a merger of equals, should go. Given the choice between them, I would vote for HP. I should stress that I have zero indications that this is even under consideration, and is really just me ruminating.

Analysts had a mixed view. Chris Whitmore of Deutsche Bank Securities has been one of the more skeptical voices on HP’s turnaround prospects. “New sheriff, old game plan,” was the headline on his note to clients today. “We remain cautious on HP’s weak fundamentals, challenging macro conditions and deteriorating cash flow,” he wrote. Despite the beat on earnings, free cash flow — at $1.4 billion in the quarter — declined by half, pointing to what Whitmore calls “very poor earnings quality.” He rates HP as a “sell,” with a $20 price target.

Brent Bracelin of Pacific Crest Securities wrote that he remains unconvinced that an unexpected strength in HP’s PC unit is sustainable. “Apple and Samsung now account for 39 percent of market share across PCs, tablets and smartphones, and have a volume advantage relative to HP’s 6 percent share,” he wrote in a note to clients this morning. He rates the shares “market perform,” or neutral, and worries that HP’s biggest problem is that about half its sales are still tied to PCs and printers.

Whitman took to CNBC this morning to talk about HP’s situation. She portrayed the turnaround under way as about “10 to 15 percent” complete. That means there’s still a lot of work to do ahead. “We’ve laid a lot of pipe and done a lot of groundwork,” Whitman told the network’s anchors in a 13-minute appearance. I’ve embedded it below:

Autonomy's Mike Lynch Talks About Being HP's Speedy Tiger Cub (Video)

Arik Hesseldahl — Tue, 06 Dec 2011 22:31:58 +0000

Mike Lynch, CEO of British software firm Autonomy, appeared on Bloomberg TV yesterday to talk about his working life as a Hewlett-Packard executive. His appearance came on the heels of remarks at a Bloomberg event in London in which he compared HP to a “mother tiger” not rolling over its cub, and praised HP for leaving Autonomy to its unique, “speedy” culture.

Autonomy, of course, became part of HP in late October, following an $11.7 billion deal that was announced in mid-August and was consummated after the company was shopped — or not, depending on whom you ask — to software giant Oracle. No one is sure of the details, except that Frank Quattrone was involved.

In the video below, Bloomberg’s Francine Lacqua asks Lynch what it’s like working with CEO Meg Whitman, and why the U.K. isn’t seen as an important hub for tech companies, a notion he takes issue with given the existence of, among other things, his own company.

HP Wants to Optimize Your Information, Whatever That Means

Arik Hesseldahl — Tue, 29 Nov 2011 08:01:27 +0000

Ever since Hewlett-Packard announced that it would spend $11.7 billion to acquire the British software firm Autonomy, there have been questions regarding how that company will fit within HP.

HP will answer some of those questions today, with a big announcement of a new enterprise hardware, software and services platform at a company event in Vienna. HP calls this its Next Generation Information Platform: IDOL 10. Practically speaking, the suite includes Autonomy, with its software smarts around finding meaning in unstructured data as varied as TV interview transcripts or chains of email communications; and the analytical muscle of Vertica, a company HP acquired in February.

The way HP sees it — and, to be fair, it’s not the first company to make this kind of argument — the ratio of data that businesses are creating to what they actually use productively is pretty big. Only 15 percent of that information is neatly organized into the rows and columns of a traditional relational database, HP argues, leaving a lot more information — fully 85 percent — that would be useful if you could only capture it, determine its meaning, and analyze it: Video, audio, email, texts, social media, meeting notes. Add to that the explosion of other real-world information gathered from sensors and other measuring devices, and it gets even more complex. It’s a concept that HP is calling “information optimization.”

Mike Lynch, the former CEO of Autonomy, is expected to speak at today’s announcement event in Vienna. And if you happen to be there, you’ll probably also hear from Jan Zadak, HP’s executive vice president for global sales. I talked to Zadak last week, and he filled me in on the news.

It’s all about capturing that “lost” 50 percent to 85 percent of information and making it useful to businesses, Zadak told me. “What we’re trying to do is address the notion of how to enable enterprises around the world to harness the potential of data,” he said. “Traditionally, what you would do is run your relational databases and put all your information in columns and rows, and then you would crunch your data. That is what you would typically do to address what we call ‘structured data’ — everything we can pull into a structural database. But 85 percent of information is unstructured — images, charts, emails, tweets. All types of conversation.”

HP has researched the issue a bit, and reckons that more than half of the information produced at your average business remains unconnected, undiscovered and unused. It’s sort of like that old myth that people use only a small percentage of the capacity of their brains — except it’s probably true. Most business decisions are made with incomplete information, and who wouldn’t want to try to to address that shortcoming?

There’s a lot to the announcement from a product perspective. I won’t go into everything, but here are some highlights. There’s an HP social media solution, intended to help companies mine useful information out of feeds on Twitter and Facebook and elsewhere, to improve customer experiences and make sure the brand isn’t suffering because of some over-eager or ticked-off commenter.

And there’s a backup system, sold under HP’s StoreOnce brand, that came directly from work done by HP Labs. The idea is to store data once, rather than make unnecessary, redundant copies that take up precious storage space.

The announcements also contain some new dashboarding and performance monitoring tools that are aimed at helping IT execs better monitor what their systems are doing and whether or not they’re performing as efficiently as they should be.

Back to Zadak for a moment. As head of global sales, he’s the one who has been charged by CEO Meg Whitman with providing the “single face of HP” to enterprise clients. To that end, I asked him what his priorities are for 2012: Apparently that means spending a lot of time developing the sales force. He took over HP’s Sales University when Thomas Hogan left the company in April, and so far “several thousand” HP employees have been through it. Expect more investments around supporting the sales force generally. Given that so many business segments saw declines in sales in the most recent quarter, that doesn’t seem like a bad idea.

Britain's First Software Billionaire Now Reports to HP CEO Meg Whitman

Arik Hesseldahl — Mon, 03 Oct 2011 21:58:17 +0000

Hewlett-Packard just announced that it had closed its acquisition of the British software firm Autonomy. This is the company that HP decided to acquire under previous CEO Léo Apotheker on Aug. 18 for $11.7 billion, the same day it said it planned to spin off its PC division and shut down its webOS business unit.

Rather than become an HP executive, Autonomy CEO Mike Lynch, who’s been described as Britain’s first software billionaire, will remain head of Autonomy, which HP will operate as a wholly owned subsidiary, though he will report to Whitman.

Of course, the deal didn’t get done without some drama — what does get done at HP without drama these days? First there was the shock at the price paid, which represented a 64 percent premium over Autonomy’s share price. It was just one of the things that led to a shareholder lawsuit against HP.

There were certainly enough questions about the deal to cause some speculation around the notion that HP might try to back out of it. Those ideas gained some currency when HP’s board of directors fired former CEO Léo Apotheker, but not before giving him a pricey exit package.

Then there was the Oracle shopping scandal. Asked about Oracle’s position in the unstructured data market two weeks ago, CEO Larry Ellison said that his company had passed on a chance to acquire Autonomy because the price was too high. Lynch, apparently falling into a PR trap laid by Oracle, took issue with Ellison, saying Autonomy had never been shopped to Oracle, prompting Oracle to publicly call Lynch a liar, then produce a set of PowerPoint slides as evidence. Lynch then went on to blame his eager banker, Frank Quattrone. Of course, it was widely known that Autonomy had been quietly shopped around for months.

So that little kerfuffle is over, now that HP is in control and its corporate communications team, led by Lynn Anderson, is in charge.

Meanwhile, there’s the larger mission to worry about: HP has to prove that Autonomy was worth all that money, and there’s an awful lot at stake. HP shares are still trading near their lowest levels in six years, and closed today at $22.20, down 25 cents. According to the disputed slides prepared by Qatalyst partners that were shared at one time or another with Oracle, Autonomy is expected to bring in $1.1 billion in revenue next year, which would amount to less than 1 percent of HP’s forward revenue projection for 2012 of $127 billion. It’s going to be tough to make it pay. But like it or not, HP is stuck with it now.