Thursday, November 22, 2012

The HP/Autonomy Kerfuffle: Why Due Diligence Doesn't Matter

HP should have known all about Autonomy -

I find this HP/Autonomy $8B write down fascinating. How can a large company like HP lack the resources to execute thorough due diligence? HP hired "blue chip" accounting firms like KPMG to conduct due diligence. You would assume that blue chip i/banks and accounting firms would be able to uncover egregious shenanigans hidden in a target company. Apparently, it doesn't matter.

1. Deferred Revenue: From my experience in telecommunications, there are NUMEROUS ways to fabricate, inflate, extract, derive, book, include, communicate or accept revenue. I've seen many directors and sales personnel book revenues from all sorts of angles, in an effort to meet quota, or even worse, YEAR END goals. The only way to drill down actual sales, is to monitor churn rates from lines of businesses. Good luck with that.

2. Due Diligence: Due diligence doesn't really mean anything. For i/bankers it means make sure you make it easy for the acquirer to sleep at night pre-acquisition. For accountants it means, make it easy for the acquiring company to use audited financials for securing financing for the acquisition. For the acquiring company it means make it easy for our board of directors and shareholders to justify our rationale for acquiring the target company (and increase our bonuses! :) ).

3. Post-Acquisition Integration: Most mergers and acquisitions erode shareholder value for one main reason: company culture. Company culture is synonymous with individual personalities. Marriages fail mostly for the same issues - lack of compatibility. In HP's case, they should have kept Autonomy as a standalone entity, and kept Autonomy's managers as-is, with a bulk of the purchase price in an earn-out. Earn-outs are crucial for techie companies because of the issue with revenue recognition.

I really can't blame Autonomy for this debacle. In my opinion, HP is to blame, mainly due to their decision to integrate and their addiction to growth via acquisition. Growth by acquisition can work if the acquiring company is growing organically and is seeking to increase their market share WITHIN their industry. It can work if a company is seeking to defend their position or to enter a new market. It doesn't work if a company isn't growing organically or if a company depends on it solely for top line purposes.

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