Case Study of a Failed M&A—Concluding Thoughts on HP’s Acquisition of Autonomy

The Mergers and Acquisition Synergies Framework we developed includes measures from research on national culture by Geert Hofstede, Erin Meyer, and Sidney Gray. We used their data to show how cultural factors in cross-border mergers and acquisition can lead to success or failure. Our research is limited to national culture factors, yet as seen in a few instances above, corporate culture can be different from national culture. These differences can cause culture clashes of their own. Further research needs to be performed to explain the differences between national and corporate culture.

Even in the best of circumstances, M&A can be fraught with difficulties. Adding in the complexity of making deals across borders necessitates a greater level of diligence in every phase of the process. Whether the merger failed due to fraudulent accounting or incompetent management by HP,1 the HP Autonomy debacle shows how differences or even similarities in national culture can precipitate difficulties in the post-merger integration process. HP’s failure to properly integrate Autonomy exhibits how value can be destroyed when firms aren’t able to resolve cultural differences. Thus, we recommend that firms engaging in cross-border deal making include researching national culture’s potential impact on post-merger integration a part of the due diligence process.

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Case Study of a Failed M&A—The Role of Accounting and Finance in HP’s Acquisition of Autonomy

Just 14 months after the acquisition, HP wrote down 80 percent of Autonomy’s purchase price. Four years later, HP sold Autonomy for a fraction of what it paid to acquire the company.  The differences in the accounting standards used by each company allowed Autonomy to recognize revenue in a more aggressive way. Ultimately, HP accused Autonomy of fraud.

 Accounting Methodology

Accounting Standards. Generally, large merging companies hire auditors to provide a due diligence report based on a target company’s financial and accounting records. These due diligence reports include differences caused by differing reporting standards. One of the major problems in the merger between HP and Autonomy came from the different accounting standards used in the U.S. and U.K. The U.S. has more rules-based accounting rules compared to the international accounting standards used in the U.K. The idea of rules- versus principles-learning is seen in the difference in reporting standards, clearly summarized by Floyd Norris in the New York Times. Norris explains, “American rules, known as generally accepted accounting principles, or GAAP, are much more specific on how to decide the relative values, while international rules tend to state principles the company should apply and offer limited examples to guide the decision.”1

Specifically, Autonomy used International Financial Reporting Standards (IFRS), which allows sellers to recognize revenue for sales on value-added resellers if specific criteria are met, but company management must use their judgement to determine when the criteria are met. Under U.S. GAAP, there are specific guidelines for revenue recognition for software sales.2 This is clearly a difference between the principles-based method in the U.K. and rules-based method in the U.S. IFRS gives standards and lets companies apply those standards using their judgement while U.S. GAAP gives standards with examples of how to apply those standards. This difference in standards led to misinterpretations of Autonomy’s revenue growth which is discussed below under the subheading ‘valuation’. Even though HP hired a team to create a due diligence report, Apotheker and the board failed to read it which lead to problems that could have been avoided.3

Valuation. On October 3, 2011 HP announced the completion of its acquisition of Autonomy for over $11.7 billion – representing a premium in excess of 79 percent of Autonomy’s closing share value4. While companies are, generally, required to pay a premium when acquiring another company (i.e., control premium), HP’s premium payment for Autonomy was derided, even then. Generally, companies don’t pay a premium as high as HP paid unless they are a part of a bidding war. In the absence of a bidding war, premiums tend to be more modest. For example, the average premium paid in deals similar to Autonomy’s (technology deal with an enterprise value of $10 billion or more) is only 32 percent.5

In the deal-making world, paying a premium is normal. In fact, the only time firms don’t pay a premium is when they structure the deal as a “merger of equals” or when the target’s share price rises when a possible deal is leaked. The rationale behind paying a premium is that companies will be able to combine their resources and function at a level higher than what the individual companies could accomplish separately. This, seemingly hidden, value is referred to as synergies and represents a significant rationale for making deals.

In this case, HP reportedly valued Autonomy “at more than $17bn, including a standalone value of $9.5bn and $7.4bn in ‘revenue synergies.'”6 Oracle’s response to a pitch meeting (a meeting where a buyer or seller will pitch the opportunity to make a deal before engaging in more serious negotiations) illustrates the subjectivity inherent in the valuation process. After HP announced it would acquire Autonomy, Larry Ellison (CEO of Oracle) said, “Oracle refused to make an offer because Autonomy’s current market value of $6 billion was way too high.”7 The fact that HP bid an amount nearly double what Oracle balked at shows the level of subjectivity inherent in valuing a firm’s standalone value and its potential synergies.

Another potential level of complication in the valuation process stems from potential differences in accounting standards.  As noted in the accounting standards section, HP uses U.S. GAAP, which is rule-based, and Autonomy used IFRS, which is principle-based. HP’s valuation of Autonomy differed from reality, in part, because of differences in revenue recognition between these two standards. “Target [Autonomy] recognizes revenue for license sales upon sell-in to its VARs [resellers] rather than on a sell-through basis to end customers.”’ 8 Under this accounting method, IFRS allows Autonomy to recognize revenue earlier than U.S. GAAP. Even though HP accounted for the differences in accounting values correctly in the due diligence process, potentially, fraudulent activity caused HP to overvalue Autonomy.

HP’s failure to properly value Autonomy is evidenced in their write down of 80 percent9 of Autonomy’s value just 14 months after the acquisition, as well as the subsequent divestiture of Autonomy four years later. In the best of circumstances, valuation is an incredibly murky process. HP’s overvaluation is, likely, the result of a complicated process coupled with differing accounting standards and fraud. Still, HP’s overly myopic focus on anticipated synergies led to exaggerated expectations, and ultimately, a merger doomed to failure before the ink dried on the offer sheet.

Professional Behavior

Optimism. Sidney Gray, the father of national culture’s effect on accounting, lists the dichotomy between conservatism and optimism as one of the major cultural dimensions affecting the practice of accounting. In practice, conservatism leads accountants to defer the recognition of revenue and accelerate the recognition of expenses. Where conservatism leads to more cautious practice of accountancy, optimism has the opposite effect. Gray’s research identifies the US and the UK as two of the most optimistic countries on earth. This section will discuss how optimism effected Autonomy’s accounting practices, as well as, HP’s rationale for making the decision to acquire Autonomy despite fierce opposition from their own shareholders.

Autonomy

In the aftermath of the failed merger, accusations of serious accounting improprieties were levied against Autonomy. In reality, Autonomy was a publicly listed company and received audits, so the degree of financial misrepresentation HP accuses Autonomy of committing is likely overstated. The role of the auditor is to provide assurance that the information recorded in the financial statements is fairly represented and follows accepted accounting standards and practices. Autonomy’s management would have to formally state their accounting methods in the company’s financial statements, so we know that they at least received approval from their auditor. Unfortunately, we do not know to the degree to which Autonomy’s revenue was overstated.

It is possible that a portion of the, alleged, accounting discrepancies are driven by the cross-section of UK based accountants’ tendency towards optimism and the principles-based practice of IFRS. While US based accountants exhibit similar inclinations toward optimism, the rules-based GAAP provides an objective standard when recognizing revenue. While the US accounting standard setting body and the international accounting standard setting body have subsequently issued a converged revenue recognition standard, the applicable accounting standards (i.e., GAAP and IFRS) at the time of the merger did exhibit considerable variation.

Hewlett-Packard

While HP was levying accusations of fraud against Autonomy, others were questioning the overall rationale of acquiring autonomy. In an interview with the Financial Times, one management researcher posited, “They are using this deflection tactic, but there is much more to this – the story is really the poor due diligence and the human aspects of why they would be motivated to make what we now know was a bad bet.”10

While the researcher quoted has the benefit of hindsight, there were indicators present, which should have discouraged the Autonomy deal.  First, upon announcing a deal to buy Autonomy, HP shares precipitously declined 12 percent and HP’s market capitalization tumbled $15 billion in reaction to the merger. Second, HP fired the CEO (Apotheker) who spearheaded the deal. Third, underscoring the untenability of HP’s pursuit of Autonomy is the fact that 70 to 90 percent of acquisitions fail.11 Finally, HP had a history of poor choice in acquisition targets – as evidenced in the following statement from the Financial Times:

As Meg Whitman, HP’s latest chief executive, disclosed a writedown of $8.8bn on the Autonomy deal, she made it sound like a unique scandal. But three months ago, she wrote down $8bn on its $13.9bn purchase of Electronic Data Systems in 2008. Not even that collapse matched Leo Apotheker, her predecessor, who wrote off more than the $1.2bn HP had paid for Palm in 2010…. With management and accounting like that, it is surprising HP has a balance sheet left.  This cascade took $20bn of goodwill and intangibles off its assets this year – almost matching its $23bn market capitalisation.12

So, in spite of ardent disapproval from its shareholders, firing its CEO, and its well-known failure in M&A, HP persisted. HP’s, seemingly illogical, persistence is described by the social psychology term “unrealistic optimism.”13 Unrealistic optimism is a tendency for individuals to rate “their own chances to be above average for positive events and below average for negative events.” Furthermore, Neil Weinstein, a social psychologist, lists the following as affecting one’s degree of unrealistic optimism: desirability, perceived probability, personal experience, and perceived controllability.14 HP’s desire to move into software and computing, combined with their belief that they could effectively manage and control integration led its management to behave with unjustifiably high levels of optimism.

The degree to which HP’s management team acted with unreasonable optimism manifests itself in the form of negligent leadership (i.e. failing to heed the Auditor’s due diligence report15 and ignoring concerns in relation to Autonomy’s accounting16), payment of an unjustifiably high premium, and refusal to walk away from an obviously unpopular acquisition.

Fraud/Earnings Management. A statement issued by HP says, “HP is extremely disappointed to find that some former members of Autonomy’s management team used accounting improprieties, misrepresentations and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy’s acquisition by HP.”17 The statement accuses Autonomy of fraudulent accounting practices. An investigation by the SEC found:

The former CEO of Autonomy’s U.S.-based subsidiary in San Francisco, Calif., participated in an accounting scheme orchestrated by Autonomy’s U.K.-based senior-most executives to meet internal sales targets and analyst revenue expectations. Autonomy issued materially false and misleading financial reports that overstated revenues in 10 consecutive quarters. Autonomy’s executives also directed HP’s due diligence team to rely on these false filings in connection with HP’s acquisition.18

Part of the reason HP wrote down Autonomy is due to “inappropriate recognition of revenue on software sales to value added resellers.”19 Appropriate revenue recognition to value added resellers is allowed under IFRS but not under U.S. GAAP. However, as Jack T. Ciesielski noted, “Accounting standards can’t prevent the creation of false documents or backdated purchase orders. No set of rules, not even the new revenue recognition standard, can prevent mischief by managers expected to play by the rules.”20 The blame cannot all be placed on the difference in standards. In this case, it looks like Autonomy’s intention was to grow revenues and meet earnings expectations:

The bogus transactions were designed to look real and throw suspicious parties off the trail. Backdated documents don’t look different from ones that aren’t backdated; the cash paid from the round-trip transactions was arranged to make dummy receivables look real. That would likely satisfy auditors, if their suspicions were unaroused otherwise.21

Differences in accounting standards between corporation’s financial statements need to be scrutinized during the due diligence process, but there is always a chance of fraud going undetected on the target company’s books.

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Case Study of a Failed M&A—The Role of Environment in HP’s Acquisition of Autonomy

The public had mixed opinions about the HP-Autonomy merger. Some shareholders felt that HP overpaid to acquire Autonomy, a sentiment picked up by the media. Many of the shareholders’ concerns were valid and stemmed from the lack of transparency concerning the deal.

Public Acceptance

Public Perception. The Cherokee have a proverb stating, “Listen to the whispers and you won’t have to hear the screams.” The quote is used to remind those in charge to be mindful of public feedback. Companies can receive feedback in a myriad of ways including increase (decrease) in share price and positive reactions from investment analysts and journalists. The rise of social media has increased the ability for the public to voice its opinions for and against cross-border deals. While most expressed interest for such a large acquisition, there were others expressing disapproval and confusion. One twitter user humorously noted, “Today at my kids (sic) kindergarten orientation the most OH convo was #HP/Autonomy and how it made little sense.”1 While many tend to discount the opinions of the layman, they can be an effective source of feedback: the public’s opinion was spot-on in the case of HP and Autonomy.

Overpayment.Just one month after HP announced its plan to purchase Autonomy, the media produced a plethora of reports revealing the public’s opinion that HP paid too much for Autonomy. The expression of this opinion can be seen by the fall in HP’s stock price throughout HP’s courting of Autonomy: “Between August 18, 2011 (the date the deal was announced) and October 3, 2011 (when the deal was consummated), HP’s market cap plummeted by $15 billion from $58.5 to $43.5 billion.”2 These opinions perhaps foreshadowed the write-down of Autonomy’s value just over a year after its acquisition. One writer simply suggests that Autonomy was not worth the value HP paid; “He overpaid for what is essentially a second-tier software company.”3 Another writer was more aggressive in his opinion by saying, “Of course it was absurdly high. An 80% premium to where Autonomy was trading in London! In fact, here is how newly-installed HP CEO Meg Whitman responded when asked if her predecessor overpaid: ‘It is what it is.’” 4 Whitman seemed to have the same mindset as a writer who said, “While most agree that HP overpaid for Autonomy, the deal is done and it’s got to make the most of it.”5 Since Autonomy had shown increasing growth over periods prior to the acquisition announcement, one writer mentioned that, “…HP, desperate to do a deal, simply overpaid for a company that was going to struggle to maintain its sales and earnings momentum and was deluded about its abilities.”6 This writer not only thought HP overpaid, but also thought that Autonomy would struggle to keep their sales as high as they had been.  Clearly, most of the public agreed that HP overpaid for Autonomy. This united opinion of overpayment may have been a warning for HP to work hard to create the value it expected from Autonomy.

Shareholders. A major indicator that the merger between HP and Autonomy might not work out came from the concerns of HP shareholders.7 Part of the reason that shareholders voiced opinions opposing HP’s acquisition decision relates to the overall lack of transparency HP demonstrated in its briefings to the public. “HP’s failure to communicate convincingly the benefits of the deal to its shareholders, as demonstrated by the significant fall in share price on the day of the announcement, was the start of the transaction’s downfall.”8 Shareholders were confused as to why HP purchased Autonomy when HP’s focus in the past was hardware and Autonomy was a software company. “‘I haven’t really seen a significant long-term vision from HP around Autonomy,’ she said. ‘This company acquisition is a completely different focus from HP’s roots.’”9 Shareholders were not made aware of the benefits Autonomy would provide and HP did not provide information as to the direction it was going in purchasing Autonomy. Because of this lack of communication, shareholders were against this merger from the beginning. In hindsight, HP should have heeded the public’s criticism of the proposed merger. While they possessed little ability to drop the tendered offer, they certainly could have used the feedback to guide their integration strategy. Instead, they failed to “hear” what the public was saying, and suffered as a result.

Previous: Case Study of a Failed M&A—The Role of Management in HP’s Acquisition of Autonomy

Next: Case Study of a Failed M&A—The Role of Accounting and Finance in HP’s Acquisition of Autonomy

Case Study of a Failed M&A—The Role of Management in HP’s Acquisition of Autonomy

Leadership changes at HP soon after the merger resulted in friction affecting employees in both companies. HP’s decentralized management style conflicted with the hands on approach Autonomy’s CEO Michael Lynch used. Autonomy’s entrepreneurial management method clashed with the HP’s entrenched hierarchical structure.

Leadership

Leadership Turnover. Leadership turnover, or the act of changing CEOs during the acquisition or integration phases, is quite common for HP: it has a history of replacing its own CEOs soon after it acquires another firm.1 At the time of the acquisition of Autonomy, Léo Apotheker was CEO of HP. Apotheker’s vision for HP included entering the software industry while trying to exit the PC business.2 He moved his vision forward by purchasing Autonomy, but his time at HP was cut short when the board at HP fired him shortly after announcing the acquisition.3 In hindsight, firing Apotheker was probably not the best course of action; Michael Lynch and Apotheker had a working relationship built on a mutual background in computer hardware and through cooperating on the Autonomy acquisition. Lynch responded to Apotheker’s dismissal saying, “Autonomy was left to try to integrate into HP without the very people who had conceived of the acquisition and who were uniquely positioned to execute that integration.”4 The problems with changing management became obvious: the new leaders were not as invested in integrating the purchased company, and there was no longer an established relationship between new and old CEOs.

In addition to changing its own CEO, HP struggled to retain Autonomy’s management. One commenter highlights HP’s inability to maintain the management of its acquired companies saying, “HP has had similar problems hanging on to the bosses of other hi-tech firms it has acquired.”5 The change in leadership from Apotheker to Whitman left many of the top executives at Autonomy frustrated and disenfranchised, and subsequently the President, CFO, CTO, CMO, COO, and the head of Aurasma (a division in Autonomy which created an augmented reality technology) left the company shortly after Meg Whitman became CEO of HP.6 Lynch didn’t last much longer, departing just eight months after Autonomy was acquired.7 HP failed to recognize and learn that maintaining top management at its target company will give employees an example of how to act in the process of merging cultures. This change in management negatively impacted the operations of the combined company.

While HP wanted Autonomy’s culture, technology, and people, it did not realize that “acquiring a firm with a valuable knowledge-based resource…does not ensure that the knowledge is successfully transferred to or combined with the resources of the acquirer during acquisition integration.”8 The failure to retain the talent and knowledge is exemplified by the “estimated 25 per cent of Autonomy’s staff” which left within seven months of the merger closing.  In failing in the early stages to effectively communicate and integrate, many of Autonomy’s employees felt alienated and left – dealing a severe blow to an already tenuous union.  Four years after the acquisition (in 2015) one employee said, “Management is in constant flux due to frequent organizational changes, and will generally only communicate with engineers to ensure critical issues are getting immediate attention.”9 Thus, HP and Autonomy illustrate the fact that the effects of management turnover can be pervasive, long-term, and debilitating.

Large Power Distance vs. Small Power Distance. One sign of an emerging problem in mergers stems from the difference in organizational structure of the merging companies. According to Meyer and Hofstede, the U.S. is typically more egalitarian while the U.K. is more hierarchical.10 Even though the U.S. is relatively more egalitarian than the U.K., HP and Autonomy exhibit the opposite cultural norm—yet again. HP is an established company with many layers of management, whereas Autonomy was small and run mainly by its founder and CEO, Mike Lynch. HP is formed in a hierarchical structure which is necessary because of the size of its operations. In contrast, Autonomy had an egalitarian structure which links back to the roots of the organization: Lynch was still in charge and highly involved in every operation of the company. An article in Business Insider notes, “He ran this company like a small private company, he was involved in all facets of the company, he was extremely hands on.”11 The level of involvement Lynch had at Autonomy is surely impossible in a corporation as large as HP, and this difference caused tension between the two companies; “It is a classic case of entrepreneurial spirit curdled by the culture of big business.”12

Though national cultures differ with regard to individual attitudes toward preferred organizational structure, neither country exhibits a strong inclination towards highly uneven power distributions.13 Moreover, the UK scores a 35 on the power distance index (PDI) which “sits in the lower rankings of PDI – i.e. a society that believes that inequalities amongst people should be minimized.”14 As aforementioned, Autonomy operated with a relatively low amount of power distance prior to combining with HP. Initial communication from HP suggests that “HP made promises to leave Autonomy’s culture alone. ‘The lioness not rolling over her cub’ was how it was expressed by some HP executives. But over several months HP began to exert more control, leaving employees increasingly disgruntled.” Had HP respected Autonomy employees’ discomfort with uneven distributions of power, many of the “culture clashes” could have been avoided. This isn’t to say that employees from all nations exhibit strong intolerance toward uneven distributions of power. For example, Chinese employees tend to exhibit little discomfort with large levels of uneven power distribution – as evidenced by their score of an 80 on the PDI.15 The culture clashes exhibit the importance of tailoring the integration style in cross-border M&A. In this case, Autonomy employees saw a relatively egalitarian structure become increasingly more hierarchical, which made them feel alienated in the new organizational environment.

Next: Case Study of a Failed M&A—The Role of Behavior in HP’s Acquisition of Autonomy

Next: Case Study of a Failed M&A—The Role of Environment in HP’s Acquisition of Autonomy

Case Study of a Failed M&A—The Role of Behavior in HP’s Acquisition of Autonomy

Autonomy’s work culture was different from what HP anticipated. HP found Autonomy’s culture to be more task–based and confrontational than HP’s culture. These behavioral problems were never resolved and resulted in friction and distrust.

Characteristics

Task-based vs. Relationship-based. Erin Meyer, author of The Culture Map, suggests that in business settings, the U.S. is more highly task-based while the U.K. is more relationship-based. A task-based culture focuses prioritizes getting the job done; whereas, relationship-based cultures need to build trusting relationships before work can be performed. In the case of HP-Autonomy these values were flipped, which could be a result of the maturity of the companies.

Although HP is a large company, Whitman appeared to be more concerned with building relationships than the typical bureaucratic CEO. After being named CEO of HP, Whitman said, “Relationships really matter. Not only your husband and your children, but the relationships you build along the way. It’s a small world, and always treat other people the way you would like to be treated yourself.”1 Whitman attempted to bring this relationship-based attitude into HP soon after her entrance as CEO; “One of the first things I did was tear down the fence and move all of our executives into cubicles. We now walk in the same door as the rest of our employees. This was symbolic of the kind of culture that we wanted to build.”2

Whitman was focused on bringing a relationship-based environment to HP, but this was a big difference compared to how employees at Autonomy were used to working. At Autonomy, Lynch was a task-based leader: “Business partners and attorneys close to the case paint a picture of a hard-driving sales culture shaped by Mr. Lynch’s desire for rapid growth.”3 Lynch cared more about getting the job done than he cared about building strong employee relationships. “Mr. Lynch is known as an exacting task-master with a ruthless attention to detail. People who have worked for him joke about “needing a hard hat” when called into his office.”4 This theory is supported by an unnamed executive who said Lynch, “told his people, Meg, anyone who’d listen, that HP should not get involved with Autonomy.”5 Lynch obviously did not care about building relationships with those at HP. “Mr. Lynch has little affection for US-style networking. Instead he relishes the pose of nerdy outsider, making waspish observations about Silicon Valley schmoozing.”6 The clash between Whitman’s relationship-focused versus Lynch’s task-focused style of leadership caused another cultural divide between HP and Autonomy.

Confrontational vs. Avoids Confrontation. Distinct cultures handle confrontation differently; some cultures welcome debate in order to create harmony while others see confrontation as rude. Meyer’s framework portrays the U.S. business environment as, generally, more confrontational than the U.K. However, Autonomy and HP’s characteristics contradict Meyer’s position. Autonomy’s environment is considerably more confrontational—with management described as confrontational towards employees. An employee review on Glassdoor stated, “The previous leadership prior to the acquisition by HP was confrontational and rough on employees but great energy has been spent to turn away from that legacy.”7 During interviews with the Wall Street Journal, former Autonomy employees, “describe [Lynch] as a domineering figure, who on at least a few occasions berated employees he believed weren’t measuring up.”8 Lynch has also been described as “a brilliant man known for his brutish office manner….”9

In contrast, Meg Whitman is calm under pressure and agreeable to employees. For example, in a shareholder meeting, Whitman responded to confrontational questions by simply stating HP just needs to keep doing better in the future.10 In this case, Lynch’s more confrontational manner conflicted with Whitman, and—as a result—it was hard for them to work together.

Previous: Case Study of a Failed M&A—The Role of Communication in HP’s Acquisition of Autonomy

Next: Case Study of a Failed M&A—The Role of Management in HP’s Acquisition of Autonomy

Case Study of a Failed M&A—The Role of Communication in HP’s Acquisition of Autonomy

HP had little experience managing software and found the software business unfamiliar. HP ultimately made the decision to let Autonomy function as an independent unit. Consequently, effective communication between the two companies was not developed.

Information Availability

One indicator that HP’s acquisition of Autonomy would not yield the anticipated results is communication, or lack thereof, between the two companies. A key takeaway from Why Deals Fail: And How to Rescue Them is that “A high-quality communication plan is crucial to the success of a deal….”1 Elements of a high-quality communication plan include openness and principles vs. application based learning.

Openness. Correct implementation in the beginning of a merger, including open communication and integration of the two companies, is critical to the success of the combined entity. In this case, HP had trouble fusing Autonomy into its other operations from the start. Initially, HP left Autonomy to operate as its own unit.  One source noted that, “According to [Mike] Lynch, Autonomy has been kept quite autonomous in HP…,”2 while another noted, “Mike Lynch, who founded Autonomy in 1996, will continue to be chief executive of Autonomy, which will be run as a separate business unit. He reports to Ms. [Meg] Whitman.”3 Given this information, it seems that the integration of Autonomy was not a high priority. HP wanted to create more value with Autonomy by expanding its business into the software market, yet in failing to properly integrate Autonomy, HP forfeited many of the potential synergistic gains. In another instance, a source noted, “Autonomy employees were physically barred from entering HP facilities, and Autonomy was forced to go through the tedious process of becoming certified as a ‘partner’ before it could work with other HP divisions, exactly as it would if it was a third-party company.”4 In spite of the lack of integration, many former Autonomy employees complained that HP’s bureaucratic culture “made it difficult to get things done” and that the “endless series of conference calls and form-filling felt ‘like being water-boarded.'”5

The fault doesn’t rest solely on HP, however. The CEO and founder of Autonomy, Mike Lynch, seemed difficult to work with as well:

An HP executive [stated] Lynch was not interested in moving forward once the deal was completed. “He was at every strategy session, was in person or on video for every meeting of the executive council…He wouldn’t work with anyone. Sometimes he was enthusiastic, but other times he’d say, ‘This makes no sense. I’m going back to London.’”6

It is even said that, “at a going-away party, an H.P. lawyer presented Mr. Lynch with a sweatshirt with the word ‘integration’ and a line through it.”7 By limiting communication between themselves, HP and Autonomy inhibited their chances of achieving successful integration.

Previous: Case Study of a Failed M&A—Introduction to HP’s Acquisition of Autonomy

Next: Case Study of a Failed M&A—The Role of Behavior in HP’s Acquisition of Autonomy

Case Study of a Failed M&A—Introduction to HP’s Acquisition of Autonomy

Shortly after Hewlett-Packard appointed Leo Apotheker to lead the company, the board approved the acquisition of the UK-based software company, Autonomy. Hewlett-Packard, well known for its computer hardware, thought the synergies it could have with Autonomy coupled with its brand recognition would give it a strong presence in the software market. This series explores management’s cultural misstep using the Mergers and Acquisitions Synergies Framework to examine how this acquisition ultimately lead to a failed merger.

Introduction

On September 7, 2016 Hewlett Packard Enterprise Co. announced an $8.8 billion deal to sell the bulk of its software division to Micro Focus International PLC.  The deal represented the divestiture of Autonomy Corp—a software maker acquired in an $11.7 billion mega deal just five years prior. The marriage of the two firms was rocky from the onset, with HP’s shareholders decrying the 79 percent premium HP paid as abhorrently high.1 On November 20 of the following year, Hewlett-Packard announced an $8.8 billion write-down of its investment in Autonomy – citing “serious accounting improprieties… and outright misrepresentations.”2 The allegations of fraud were rebutted by Autonomy’s former CEO Michael Lynch and marked the beginning of a disastrously messy public relations battle fought by Autonomy’s ousted CEO and members of HP management.

In November 2010 Hewlett-Packard, a technology firm based in Palo Alto, California, brought in Leo Apotheker as its new CEO. Apotheker was expected to contribute to HP’s growth through completing value accretive acquisitions. Within a year of being hired, Apotheker spearheaded HP’s acquisition of Autonomy, a software company founded at the U.K.’s Cambridge University. The acquisition of Autonomy represented a marked shift in strategy for HP. While HP had demonstrated capability in the hardware market, they possessed very little prowess in software and computing. Thus, Apotheker attempted to catalyze HP’s entrance in the software market by buying an already well-established company.

Although HP claims that the write down was due to “accounting improprieties”3, there are other factors belying this failed merger. The remainder of this paper provides insight into the impact of cultural differences on the HP-Autonomy debacle, offers examples, and provides guidance about due diligence for cross-border mergers. This paper focuses on the cultural factors discussed in the M&A Synergies Framework: communication, behavior, management, environment, accounting and finance, optimism, and earnings management.

Next: Case Study of a Failed M&A—The Role of Communication in HP’s Acquisition of Autonomy

M&A Synergies Framework: Due Diligence Checklist—Accounting and Finance

This is a brief checklist of accounting and finance items to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework: Accounting and Finance

Accounting Methodology

Accounting Standards. Countries use various accounting standards including International Financial Reporting Standards (IFRS) and their own Generally Accepted Accounting Standards (GAAP).

    • Understand that countries account for transactions differently. Knowing that countries account for transactions differently will help forego mistakes in valuing your target company.

Valuation. Differences in accounting standards, professional behaviors, and valuation methods can cause under- and over-valued bids.

    • Decide on a walkaway price before negotiations. Overvaluation of a company will result in write-off of goodwill. Although goodwill write-off is still possible, deciding on a walkaway price will likely prevent you from overpaying and thus prevent a large write-off in the future.

Professional Behavior

Professionalism vs. Statutory Control.1 The level of professional judgement used when recording transactions varies between countries.

    • People that are less educated may need training to reach the level of professional judgement needed.2 Take time to evaluate the level of professional understanding within each company and decide how to best train them.

Uniformity vs. Flexibility.3 Uniformity versus flexibility is a long-debated issue with no clear end.4  It is still necessary to consider when merging with another company, both in another country and in your own country.

    • Be aware that although accounting standards are set, the way a company interprets them may be different. Taking uniformity and flexibility into account will better help your company in the accounting due diligence process.

Conservatism vs. Optimism.5 The level of risk and caution preferred by certain culture differs. Below are some suggestions for working with conservative countries.

    • Check income and expense recognition of the target company. Some research suggests that conservatism creates less persistent income over time.6
    • Check asset valuations. Research has also shown that conservative cultures are more likely to undervalue their assets.7
  • Secrecy vs. Transparency.8 The amount of information a company publicly discloses differs between cultures.
    • Take time to teach employees the desired level of transparency. Since cultures have different ideas of the acceptable amount of information shared with the public, it is important to teach all accounting and finance employees the correct standards used by the company.

Fraud/Earnings Management. Because of the differences in accounting seen in the above values, the likeliness of fraudulent behavior is high when looking to abroad.

    • Consider a country’s Corruption Perception Index before merging. The Corruption Perception Index (CPI) score will tell you how prevalent corruption is within the country. This CPI could likely relate to the level of corruption within the company, which will provide clues about their accounting.

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M&A Synergies Framework: Due Diligence Checklist—Environment

This is a brief checklist of environmental factors to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework—Environment.

Public Acceptance

Foreign Relations. A country’s relationship with that of the target company’s country can make or break a merger.

    • Be well informed about your home country’s relationship with the home company of the target. Government disapproval of a merger causes resistance which may inhibit the success of a merger. In some cases, a country may oppose a merger completely.
    • Check out Marsh’s political risk map. The Political Risk Map, created by Marsh (a risk management company), scores countries based on their level of political risk. This map may help you determine the political, operational, and economic risk of the country you are expanding in. Figure 1, below, is a screenshot of the political risk map for 2018.

Figure 1. Political Risk Map 2017

Source: https://www.marsh.com/content/marsh/political-risk-map-d3/prm-2018.html#

Public Perception. The public’s reaction to a merger may provide helpful information to the merging companies.

    • Consider the public’s likely reaction toward the merger in both companies’ home countries. The public’s reaction may foreshadow the outcome of the merger. Listen to their concerns and take them into account when making plans for the future.

Logistics

Location. The physical location of a company can cause problems for merging companies.

    • Think carefully about the physical location of your Target company. Companies located in rural areas take longer to travel to. This could cause problems during the integration stages of a merger as people travel between company locations. It could also cause problems with new employees moving to that location.
    • Consider the location of the new headquarter for the merged company. Choosing the headquarter location of a company means choosing the time zone your company will primarily operate in. This can cause difficulty for international business meetings which often leads to employee dissatisfaction.

Regulatory Differences. The regulatory differences between cultures can cause unexpected challenges.

    • Know who makes the rules and what those rules are. Many countries have takeover panels that have specific rules for doing deals in their country. Other countries have a government department focused on takeover deals. Learning the rules of these organizations and committees will help with a smooth takeover process.

 

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M&A Synergies Framework: Due Diligence Checklist—Management

This is a brief checklist of management factors to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework—Management.

Leadership

Leadership Turnover. Retaining top leaders can have a big impact on the outcome of the merger.

    • Be clear about who will be filling senior positions in the merged entity. Not only does upper management provide an example to their employees, but they also are probably the most invested in the merger. Keeping them will better help achieve the goals of the merger. Additionally, if firm culture is one reason for the merger, retaining the firm leaders will help retain that firm culture.

Employee Turnover. One of the biggest assets in a merger is employees. Retaining them will likely result in greater synergy.

    • Communicate effectively to avoid high turnover. If there is a high degree of uncertainty surrounding the merger, employees may leave the company of their own accord. It is best to communicate as thoroughly as possible to reduce fear-based departures.

Large Power Distance vs. Small Power Distance.1 The appropriate distance between leaders and subordinates varies between cultures.

    • Find the proper person to take care of your issue. In hierarchical cultures, specific people have specific jobs. If this is the case, getting a task performed may take longer since that person may have other responsibilities or may even be out of the office.
    • Understand your position in the organization. Even though is often acceptable for U.S. workers to directly address high-level leaders in their own culture, other cultures may view it as inappropriate or presumptuous. Likewise, when you are the higher-level executive, employees may expect you to behave in a more formal, authoritative manner, often because they believe that you reflect company status.2

Decision Making

Consensual vs. Top-down.3 The way people from different cultures make decisions can be frustrating if it differs from your own decision-making process.

    • Be patient with the decision-making process. Americans tend to make decisions quickly and change that decision many times before a final decision is made. Other cultures are more averse to the change. They may take a while to get decisions made, but that final decision is often quickly implemented and rarely changed.
    • Participate in the decision-making process. In some consensual cultures, it is expected that everyone shares their opinion and ideas during the decision-making process. Others will notice if you don’t participate and decisions won’t be made without you.

 

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