Hewlett-Packard carried out only six hours of due diligence on the finances of the British software company Autonomy before buying it for £8bn, in a deal that ended in disaster and a $5bn (£3.8bn) fraud case, according to court documents.
Successor companies to HP and Autonomy are now seeking more than $5bn in damages from Autonomy’s founder, Mike Lynch, and the firm’s former finance boss Sushovan Hussain.
The claimants accused the executives of artificially inflating the value of Autonomy ahead of the sale, which took place in 2011. A year after the acquisition, HP wrote down $8.8bn in relation to the purchase, alleging accounting irregularities.
Lynch and Hussain deny all of the allegations in the case. In the defence’s opening statements this week, Robert Miles QC, representing Lynch, argued that HP sought to blame Autonomy’s executives for a “botched” acquisition and to deflect attacks on the US company’s leadership.
The hurried swoop on Autonomy was part of a change of strategy by the then HP chief executive Léo Apotheker – who was sacked by HP before the deal completed – to move away from computer hardware towards higher-margin software business.
HP carried out only a brief period of due diligence in order to use the Autonomy purchase as a “counterpoint to various bits of bad news that HP was expected to publish” on the same day the deal was announced, the defence’s opening submission to London’s high court said. The due diligence allegedly started on 1 August and ended on 18 August, the day on which HP’s strategy change was announced.
The defence’s submission said: “The due diligence of Autonomy’s finances was limited and largely consisted of four conference calls lasting approximately 1 to 1 1⁄2 hours.”
Accountants KPMG, software consultants Black Duck and the law firm Freshfields assisted HP in the due diligence, a process of checks which corporate buyers carry out on acquisition targets. However, KPMG was unable to complete its checks before the announcement, the defence said.
The defence’s submission said: “While KPMG had been contracted to provide a number of services in relation to the due diligence, HP’s tight timetable meant that by this point they had not carried out all of the tasks which they had been engaged to carry out. HP nevertheless decided to go ahead.”
HP also did not request some non-public information from Autonomy because it was afraid that Oracle, a large rival, would make a bid for the company in order to gain access to the commercially sensitive information under British takeover law, the documents said.
The case continues at London’s high court, which has now heard the defendants’ opening statements.
Paul Casey, representing Hussain, said: “It is simply impossible that the defendants could have carried out a fraud of this scale on their own, without the assistance of a huge number of employees of Autonomy.”
Lynch, who was present in court throughout the opening statements of the civil fraud trial, also faces separate criminal charges in the US. He denies the 17 charges from the Department of Justice, which include conspiracy and wire fraud and carry a maximum prison sentence of 25 years.