How desperation drove HP’s Autonomy disaster

For Leo Apotheker, the former HP CEO, a July 2011 meeting with Autonomy founder Mike Lynch at a chic seaside resort in France was pivotal to his effort to rebuild the technology giant.

In the nine months since taking the helm at HP, Apotheker had tried furiously to find a way to move the lumbering company away from its low-margin computer hardware business and into the lucrative corporate software and services arena.

Apotheker was looking for a big, transformative acquisition and after overtures to several companies went nowhere, he set his sights on Autonomy.

After two months of negotiations on what was known at HP as “Project Tesla,” Apotheker sat down with Lynch at a hotel in Deauville on the Normandy coast – and shook hands on what would become an $11.1 billion deal.

The Autonomy takeover was indeed a bombshell – but not in the way that Apotheker had hoped. When it was announced in August 2011, HP’s stock plummeted amid withering criticism of the price tag. Within weeks, Apotheker was out of a job. Within months, Lynch and his new masters at HP were at war.

What happened is he talked to Autonomy and they got into a dialogue – it was out of frustration and desperation to a large degree

Inside a year, Lynch had been forced out and HP was investigating allegations of major accounting irregularities at Autonomy. That culminated in HP saying last week it was writing off more than three-quarters of the value of Autonomy, and telling US and UK regulators about alleged accounting fraud.

The implosion of the Autonomy deal has raised questions about how HP and its army of lawyers, accountants and investment bankers could have overlooked warning signs and gone ahead with the acquisition.

After speaking with numerous employees at the company, the picture that emerges is of a firm so desperate to plot a new course that it may have been far too accepting of Autonomy’s published and audited accounts.

It has also cast a shadow over Lynch, widely regarded as a brilliant but difficult executive; he left HP in May and has flatly rejected the company’s claims of accounting shenanigans or that HP had been deliberately deceived.

Apotheker’s anti-Midas touch

Apotheker’s appointment as CEO of HP in November 2010 was greeted even at the time with head-scratching – and criticism. A veteran of the German corporate software maker SAP, he had no obvious qualifications to run HP – a company with sales several times SAP’s – especially given his lack of experience in the computer hardware business.

But the US company was reeling from a series of boardroom imbroglios that culminated in the firing of then-CEO Mark Hurd in a sexual harassment scandal in August 2010.

Apotheker went on the acquisition trail almost immediately, even though previous HP takeovers like Compaq and Palm had not worked out well. He was given the mandate of moving HP in a new direction – software seemed logical given the decline in HP’s traditional computer business – and felt the need for a transformative acquisition to do that, according to one of the sources.