[ by Larry Goldfarb ]

According to its website, "Autonomy is a market-leading software company that helps organizations all over the world understand the meaning in information."  Hewlett-Packard, from Wikipedia, "Provides products, technologies, software, solutions and services to consumers, small- and medium-sized businesses (SMBs) and large enterprises."  To me, one seems like new generation and the other, older generation.  In a nutshell, that explains why HP was willing to pay $10 billion for Autonomy. 

Was Autonomy worth $10 Billion?  Accounting firms like Deloitte says its financials were not misstated.   Lynn E. Turner, former chief accountant of the Securities and Exchange Commission, wondered how the $200 million of Autonomy’s revenue that H.P. says was improperly recorded could "translate into a $5 billion write-off."   He points out that Autonomy reported only $3.5 billion of total assets before it was acquired, yet is being accused of at least $5 billion of accounting problems.

The reason that revenue translates into market value is how small, highly growing firms determine market value.  Experts use multipliers based on the type of revenue the firm has.  For instance, recurring revenue is valued one way, while one time revenue is valued another.  Hedge funds and private equity firms place a lot of emphasis on these firms inflating their revenue because that’s how the investors get paid.  I am not implying that anything they say or do is illegal or even unethical.  It’s simply the nature of the animal.

These same firms are perhaps more enlightened when they analyze companies like Autonomy. “It was dead easy to spot that Autonomy’s statements weren’t right,” said John Hempton, the manager of Bronte Capital, a hedge fund based in Sydney, Australia. “The extent of it I didn’t know.” Mr. Hempton voiced his suspicions about Autonomy last month in a presentation to an investment forum in New York.

Some were raising questions even earlier. In July 2009, Kynikos Associates, the firm founded by the investor James S. Chanos, wrote a detailed report that criticized Autonomy’s accounting in ways that now appear prescient.  In its 2009 note, Kynikos said that Autonomy’s deferred revenue appeared lackluster. It added that the company might have masked the underperformance with acquisitions.

[C-I Note: I think the HP claims are extremely overblown.  Firms like Autonomy are hard to value and the amount HP paid was presumably what it took to buy the company.  Perhaps Meg Whitman and HP have another agenda.]

To read more about this, read [NYT Dealbook, 11/21/12]