Inside the HP-Autonomy lawsuit: Timeline of an M&A disaster

Meg Whitman and Mike Lynch

Around the turn of the century, Autonomy Corporation was one of the darlings of the UK technology industry, specialising in knowledge management and enterprise search. It went on an acquisition spree in the early 2000s, driving up its revenue, before being swallowed itself by Hewlett Packard (HP) in 2011, in a deal that valued it at over $10 billion.

But this rags-to-riches tale doesn’t have a happy ending. In fact, the HP acquisition of Autonomy probably ranks among the most notorious failed mergers and acquisitions (M&A).

No sooner had the acquisition closed than revenue began to flag, prompting an internal investigation in which HP uncovered signs of past creative accounting at Autonomy. Rather than selling software to customers, HP said, Autonomy had been selling them hardware at a loss, then booking the sales as software licensing revenue.

That discovery forced HP to write down the value of Autonomy by more than $5 billion, triggering a wave of shareholder lawsuits. HP in turn sued (then former) Autonomy CEO Mike Lynch, and the U.S. Department of Justice launched a criminal investigation.

Last we heard, Lynch was in the UK, facing extradition to the US.

Here’s how it played out.

The 1990s: Founding myth

1990: Mike Lynch, an academic in Cambridge, England, borrows — or so the legend goes — £2,000 to start Cambridge Neurodynamics, going on to develop the software that would later give rise to Autonomy. However, Companies House, the UK register of commerce, has no record of such a company, and it’s not until 1997 that Lynch creates another company, called simply Neurodynamics.

1996: Lynch sets up Autonomy Corporation in the UK. Its Agentware internet search tools are used by enterprises including Barclays Bank and Unilever and sold as shrink-wrapped software through retail outlets.

July 1998: Autonomy’s IPO on EASDAQ values the company at $165 million.

The 2000s: Spending spree

September 2003: Autonomy completes its purchase of video management software vendor Virage and rebuilds the company’s software on its own IDOL (Intelligent Data Operating Layer) unstructured data management platform.

March 2004: Autonomy acquires NativeMinds and Cardiff Software.

November 2005: Autonomy agrees to buy search technology developer Verity for $500 million, its third acquisition of the year after NCorp (in February) and etalk (in June).

May 2007: Autonomy spins off its Blinkx consumer software unit in an IPO.

July 2007: Autonomy pays $375 million for content archiving and electronic discovery specialist Zantaz.

October 2007: Autonomy acquires data management specialist Meridio for £20 million.

January 2009: Autonomy buys enterprise content management vendor Interwoven for $775 million.

June 2010: Autonomy acquires CA Technologies’ information governance business.

The 2010s: Autonomy’s unravelling

September 2010: Ex-SAP CEO Léo Apotheker is named CEO of HP.

March 2010: Apotheker says he wants to transform HP from a hardware producer to a software and services provider.

May 2011: Autonomy sneaks in one last acquisition, of online backup service Iron Mountain Digital, for $380 million.

July 2011: Apotheker and Lynch reach a deal to sell Autonomy to HP, and HP begins its due-diligence examination of Autonomy’s finances. Lynch’s lawyers will later claim that HP executives spent just six hours in conference calls with his team.

August 2011: HP agrees to acquire Autonomy for $42.11 per share, a premium of around 60 per cent over the market price.

September 2011: HP fires Apotheker, naming Meg Whitman CEO.

October 2011: HP buys 87.34 per cent of Autonomy for £5.44 billion, valuing the company at $10.3 billion at 2011 exchange rates — although later reports will put the price as high as £8.7 billion or $11.7 billion.

May 2012: A senior member of HP’s Autonomy unit raises concerns about Autonomy’s accounting practices. Whitman hires PricewaterhouseCoopers to investigate. Meanwhile, Whitman announces the lay-off of 27,000 HP workers to cut costs. Lynch is among them, for “failure to meet agreed performance goals, including financial metrics.”

November 2012: HP takes an $8.8 billion impairment charge, linking more than $5 billion of it to serious accounting improprieties, misrepresentation, and disclosure failures at Autonomy discovered by an internal investigation by HP and forensic review of Autonomy’s accounting practices prior to its acquisition. HP alleges that the misrepresentations included selling low-end hardware at a loss and recording the transactions — said to account for up to 15 per cent of Autonomy’s total revenue — as licenses for Autonomy’s IDOL software.

December 2012: HP says it is cooperating with the Department of Justice, the Securities and Exchange Commission and the UK’s Serious Fraud Office in an investigation relating to Autonomy.

February 2014: HP Autonomy breaks IDOL into discrete services.

June 2014: HP agrees to settle shareholder lawsuits. The plaintiffs agree to assist HP in bringing claims against Lynch and Hussain, and HP agrees to beef up its due-diligence process for evaluating acquisitions. Claims against HP executives will be dropped.

January 2015: The UK’s Serious Fraud Office calls off its investigation of Autonomy, saying it has “insufficient evidence for a realistic prospect of conviction.” This is hardly a surprise as the SFO has a reputation for failing to secure convictions.

March 2015: With the criminal investigation over, HP begins a civil case, suing Mike Lynch for $5.1 billion in the UK’s High Court alleging that Lynch inflated Autonomy’s revenues by $700 million.

June 2015: HP reaches a final settlement with PGGM Vermogensbeheer BV, the lead plaintiff in a securities class action brought over the $8.8 billion impairment charge relating to the company’s acquisition of Autonomy. HP’s insurance will pay out $100 million to those who purchased HP shares between August 19, 2011, and November 20, 2012, releasing HP and its executives from any Autonomy-related securities claims.

November 2015: HP separates into two companies, with Hewlett Packard Enterprise (HPE) selling enterprise services and servers, and HP Inc. (HPI) selling printers and PCs. HPE assumes responsibility for the Autonomy litigation, agreeing to split any damages awarded with HPI.

May 2016: HPE sells its IT services business to CSC, forming DXC Technologies. OpenText buys HP TeamSite, a customer experience management platform developed at Interwoven before its acquisition by Autonomy, renaming it OpenText TeamSite.

September 2016: HPE sells software assets including remnants of the Autonomy business to Micro Focus, IDOL among them.

November 2016: A federal grand jury returns a criminal indictment against Sushovan Hussain, Autonomy’s former CFO. The grand jury alleges that Hussain, together with others, conspired to engage in a fraudulent scheme to deceive purchasers and sellers of Autonomy securities and HP about the true performance of Autonomy’s business, financial condition, and prospects for growth. 

Hussain and others made false and misleading statements to, among others, regulators, and market analysts. The indictment alleges that HP relied on the accuracy and truthfulness of the statements and disclosures when considering whether to buy Autonomy and at what price.

September 2017: HPE finally sells its software business, of which Autonomy assets make up a small part, to UK-based Micro Focus International. HPE receives $2.5 billion in cash from Micro Focus, while its shareholders receive Micro Focus shares worth around $6.3 billion.

April 2018: The federal grand jury finds Hussain guilty. He appeals.

November 2018: A federal grand jury indicts Mike Lynch with conspiracy to commit wire fraud and multiple counts of wire fraud, saying that he provided HP with materially false and misleading financial statements for Autonomy while HP was considering the acquisition.

November 2019: The federal jury adds a new charge of securities fraud, with a maximum prison sentence of 25 years, to its indictment of Mike Lynch.

December 2019: The US asks the UK to extradite Mike Lynch to face charges of securities fraud, wire fraud and conspiracy.

The 2020s: Resolution

August 2020: A US appeals court upholds former Autonomy CFO Sushovan Hussain’s fraud conviction and five-year prison sentence on 14 counts of wire fraud and one of securities fraud for falsely inflating Autonomy’s revenue.

September 2020: The UK’s Financial Reporting Council fines Deloitte £15 million for failings in its auditing of Autonomy’s accounts between January 2009 and June 2011. At issue were Autonomy’s sales of hardware and its sales of software licenses to value-added resellers rather than to end customers.

January 2022: The UK’s High Court rules on the HP civil suit, finding that Mike Lynch had fraudulently inflated Autonomy’s value by misleading HP about its performance. Later the same day, the UK’s home secretary approves Lynch’s extradition to the US to face the grand jury’s charges.