View the article online at http://citywire.co.uk/money/article/a635907
The fund manager who saw Autonomy's problems before HP
Artemis fund manager Tim Steer expresses his shock that Hewlett Packard did not see the problems at Autonomy before splashing £12 billion on acquiring the UK software provider.
Tim Steer, manager of the Artemis UK Growth fund who short sold Autonomy before its acquisition by Hewlett Packard last year, has spoken of his astonishment that the accounting problems at the UK tech stock were not discovered earlier.
Yesterday shares in Hewlett Packard, a US technology hardware giant, plunged after it wrote off $8.8 billion (£5.5 billion) from the valuation of Autonomy, the Cambridge-based software provider it acquired for $12 billion.
In a statement HP revealed that a senior member of Autonomy's management had turned whistle blower following the departure of its founder Mike Lynch (pictured below) in May, raising questions over the accounting and business practices.
A subsequent internal investigation, which included a 'forensic review' by auditors PricewaterhouseCoopers, revealed that Autonomy had been massively overvalued at the time of the acquisition, it said. 'This appears to have been a wilful effort on behalf of certain Autonomy employees to inflation the underlying financial metrics of the company in order to mislead investors and potential buyers,' HP said in its statement.
It said it had referred its findings to the US Securities and Exchange Commission and the UK's Serious Fraud Office.
Steer, whose attempt to make a profit from a fall in Autonomy's shares was scuppered by HP bidding up the price, said signs pointing to Autonomy’s problems were ‘written all over the accounts’ and that HP should have done more due diligence.
Steer said: ‘There were one or two fund managers and investment analysts who were bold enough to stand up and take a view, especially when they had a look at the sets of accounts that Autonomy were producing.'
Today's Financial Times supports this view, saying there were people asking 'sticky questions' about Autonomy's accounts. Its Lex column says: 'Analysts from both Cannacord Genuity and Berenberg, for example, have suggested that Autonomy's revenue growth was not consistent with changes in the deferred revenue line on its balance sheet; and that, for a software company, its cash generation was oddly low relative to reported profits'.
Steer added: ‘It is surprising that HP never opened up the reports and accounts ahead of offering $12 billion for Autonomy.’
Steer conceded his view on Autonomy at the time – to short the stock – hit the fund, although ultimately it was proved to be the correct view.
‘It was obvious to quite a few of us that this company had issues. I was short of it…other managers got lucky.’
At the time of the bid, Steer said he was ‘gobsmacked’ by the premium that HP had agreed to pay in the $12 billion deal to buy Autonomy, which provides software that helps companies make sense of unstructured information.
Among the accounting failures cited by HP were: 'the mischaracterisation of revenue from negative-margin, low end hardware sales with little or no associated software content' as license revenue, making up to 15$ of group turnover.; and, 'the use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale.'
Lynch, who made $800 million from the sale of Autonomy, told the Wall Street Journal the allegations were 'utterly wrong and we reject them completely.' He insisted that HP had undertaken 'meticulous due diligence' on Autonomy and that to wipe off nearly $9 billion off the purchase price was 'mad'. He suggested that the allegations were an attempt to cover up other problems at the company, which has been wracked by senior management conflict over the strategic direction of the group.
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by Gavin Lumsden on Jan 20, 2017 at 17:01