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|30 November, 2018

Fraud case reminds that bad M&A is a team effort

US filed criminal conspiracy and wire fraud charges against Mike Lynch over his role in the $11bln sale of the company to Hewlett-Packard in 2011

Mike Lynch, Founder and Chairman of Autonomy Corporation, poses for photographers at an awards ceremony in central London March 13, 2008. Lynch was given the Innovator of the Year award at the EBLA (European Business Leader's Awards) ceremony at Claridge's Hotel in London.

Mike Lynch, Founder and Chairman of Autonomy Corporation, poses for photographers at an awards ceremony in central London March 13, 2008. Lynch was given the Innovator of the Year award at the EBLA (European Business Leader's Awards) ceremony at Claridge's Hotel in London.

Reuters/Toby Melville

NEW YORK - Bad M&A is often a team effort. A case in point is the attempt by U.S. prosecutors to prove Autonomy Chief Executive Mike Lynch deceived buyer Hewlett-Packard in their $11 billion deal in 2011. That situation is muddied by accounting rules that have since been cleared up somewhat. But disasters like the Autonomy deal typically have three common features: an opportunistic seller, desperate buyer and advisors overlooking red flags.

U.S. prosecutors in San Francisco say Autonomy cooked the books to get a better sale price than it deserved. A majority of the purchase price was written down about a year later. Lynch has always said Autonomy was just following regular UK accounting practices at the time. Those allowed lots of discretion on booking software revenue, while U.S. GAAP accounting was far more specific. Since then, accounting regulators have waded in, and this gap is no longer a chasm.

Closure has already taken seven years, and will take longer. The UK’s Serious Fraud Office closed an investigation into the sale in 2015 because it said there was insufficient evidence for a realistic prospect of conviction. On the other hand, a U.S. jury convicted Autonomy’s chief financial officer at the time, Sushovan Hussain, of fraud in a case in April. He is appealing.

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What’s less controvertible is that the seller had expanded rapidly prior to the sale through acquisitions, and analysts had questioned the aggressiveness of its accounting. The buyer, on the other hand, was in disarray with a fractured boardroom, a revolving door of chief executives, and worsening business performance. In short, there was an opportunistic seller looking for a puffed-up price and a desperate buyer unwilling or unable to look under the hood – all set against a gray mist of accounting-standard differences.

Methods and names change, but some factors are evergreen. A long tech boom has created giant private companies like Uber and Airbnb with aggressive cultures of exploiting gray areas in regulation. Old-line companies look on with a mixture of envy and fear, wondering if a deal can solve their woes. Under that kind of pressure, details are bound to get overlooked. As author Upton Sinclair wrote, “It is difficult to get a man to understand something when his salary depends upon him not understanding it.”

CONTEXT NEWS

- The United States filed criminal conspiracy and wire fraud charges against Mike Lynch, the former chief executive of Autonomy, over his role in the $11 billion sale of the company to Hewlett-Packard in 2011. The buyer wrote down a majority of the purchase price within two years of completing the purchase.

- Lynch’s lawyers said in a statement that he would fight the charges. The charges, filed in San Francisco, carry a maximum penalty of 20 years in prison.

- The UK’s Serious Fraud Office closed an investigation into the sale in 2015 because it said there was insufficient evidence for a realistic prospect of conviction.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by John Foley and Amanda Gomez) ((robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))