Who's to blame when a deal goes south

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For a long time, when we spoke of “data,” we thought of neatly organized columns and rows like we see in a spreadsheet. Billions of lines of code have been written to analyze such structured data, but what about pulling data from emails, videos, and other unstructured sources?

Anticipating the worldwide surge in unstructured data, Mike Lynch founded Automony in Cambridge, England in 1996. The company was a star. Lynch was tagged as the UK’s Bill Gates. Autonomy grew rapidly through acquisitions, was listed on the London exchange, and acquired for $11.1 billion by US technology behemoth HP (formerly known as Hewlett-Packard), in 2011.

The sh*t hit the fan almost immediately. In HP’s rush to transform itself into a software and services company and move away from the hardware business that it was known for, the company rushed into the Autonomy acquisition without appropriate diligence. Less than a year after the deal was completed, HP wrote off $8.8 billion of the deal’s value.

I never bought into HP’s stance on the inflated revenues argument since there is a simple analysis that a buyer should do when acquiring a company. The analysis is known as the “cash look back” and is as basic as comparing the last 12 months of cash collections to the revenues recognized. If revenue recognized is more than cash collected — and cannot be explained by timing differences or other reasonable explanations — then revenue is overstated. The price of the deal should be reduced.

There were other issues such as a lack of cultural fit between the entrepreneurial Autonomy and the staid HP, as well as a failed integration of the two companies.

Lynch had been facing up to 20 years in prison if convicted in the U.S. case, but was cleared of all charges in June 2023, more than 10 years after the ordeal started.

Two months after being cleared, Lynch and two dozen family and friends were cruising on Lynch’s 200-foot yacht off the coast of Italy celebrating the victory. A freak storm sunk the boat and Lynch and six others were lost.

Key Takeaways

• Acquisitions are easy to talk about, easy to sketch out on a whiteboard, but super-difficult to implement. The numbers might look good, but how will the leadership of the merged companies co-exist? The HP-Autonomy deal faced another common problem when the big company acquires the little company: big company moves slowly and little company is nimble. “Social issues,” not financial issues, usually derail deals.

• A board of directors is supposed ask the tough questions when management is committing the company’s capital. Problem is, a large part of directors’ compensation is in stock, so they get deal fever along with management and there is no check and balance. (The entire board of directors thing across all industries needs a major overhaul in my opinion.)

• No deal is perfect. Acquisitions should be priced by the buyer to allow for some wiggle-room. The buyer doesn’t know what it doesn’t know, so there is no sense in pricing a deal for perfection, since it never happens.

Things I think about

When the cargo freighter Edmund Fitzgerald was lost during a storm on Lake Superior, the 750-foot ship went nose down to the bottom, which was only 500 feet in depth. With 250 feet of the ship above the water, it cracked and sunk in two pieces.

Recommended reading

Secrets
First-person account of the release of the Pentagon Papers. Well written story about what it’s really like to be a DC insider.

OpenAI is a Bad Business
Ed Zitron is a technology contrarian and not afraid of, well, anything.

Launch Key
Weekly newsletter full of wisdom on how to launch a business.

The HP-Autonomy Lawsuit
Timeline of a disaster

The Psychology of Money
Lessons on money and life. I have given this book to a dozen people.