Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the HP Board Handled the Autonomy Writedown
Transcript
- Lucas: So August 2012, Hewlett-Packard's board is sitting on a disaster. They'd paid roughly eleven billion dollars for a British software company called Autonomy just a year earlier, and now they're about to announce that almost nine billion of that value has essentially vanished. Luna: Nine billion. That's not a rounding error. Lucas: Right. And the way they frame it publicly is even more brutal. They say that a series of accounting improprieties at Autonomy, things like inflating revenue and mischaracterizing expenses, forced them to write off the bulk of the purchase price. They're essentially accusing the founders and the CFO of cooking the books. Luna: So the board is saying, we got duped. But didn't they do any due diligence? Lucas: That's the question that follows them for years. And to be fair, the board did hire outside advisers. KPMG audited Autonomy's financials, Barclays and Perella Weinberg were on the deal. But the diligence was, let's say, aggressive in its speed. The deal was announced in August 2011 and closed in October, which is roughly ninety days. For an acquisition of that size, that's fast. Luna: Fast and furious, apparently. Lucas: Exactly. And here's a detail a lot of people miss. The board's lead director at the time was Ray Lane, a venture capitalist, former Oracle president. He was a strong advocate for the deal. In fact, he was so convinced that he waived the usual conflict of interest review because Autonomy's CEO, Mike Lynch, had a personal relationship with another HP board member. Luna: Wait, they waived a conflict review? That seems like a red flag. Lucas: It is. And it's one of the first things that shareholders pointed to when the writedown hit. But the board's official position was that they were misled. They said Autonomy's management hid the true nature of their revenue, and that the due diligence was thorough but unable to uncover deliberate fraud. That's the narrative they stuck to. Luna: But the market didn't buy it, right? The stock dropped like a rock. Lucas: It did. HP shares fell about twelve percent the day they announced the writedown, and the stock never really recovered. The board faced a wave of shareholder lawsuits, and the company itself lost credibility. The bigger problem was that this wasn't an isolated incident. HP had already made a mess of its acquisition of Palm, and the board had forced out CEO Mark Hurd in 2010 over an expense-report scandal. Luna: So this board was already under a microscope. Lucas: Under a microscope, and now they're dealing with a nine-billion-dollar hole in the balance sheet. And their response, at least initially, was to circle the wagons. They issued a press release that put the blame squarely on Autonomy's management. They hired outside counsel to investigate, and they referred the matter to the SEC and the UK's Serious Fraud Office. Luna: So they were playing offense. But what about the shareholders who were asking, did you do your job? Lucas: That's where it gets interesting. The board's lead director, Ray Lane, took a lot of the heat. At the annual meeting in 2013, he faced a real challenge. A group of shareholders, led by the advisory firm Institutional Shareholder Services, essentially said, you need to be held accountable. They pushed for his removal from the board. Luna: And he survived? Lucas: He barely survived. The vote was close, but he kept his seat. However, the board did make changes. They split the roles of chairman and CEO, which was a big governance shift. And they brought in new independent directors, people with more technology and M&A experience. So the board was trying to show that they were listening. Luna: It's a classic case of a board trying to thread the needle between defending their own decisions and demonstrating they've learned something. Lucas: That's exactly the tension. And it's worth noting that the board's approach had a mixed record. On the one hand, they did preserve some credibility by not covering up. They were transparent about the writedown, and they pursued legal action. On the other hand, they never really answered the question of why they missed the red flags in the first place. Luna: What red flags were there? I mean, Autonomy was a fast-growing software company, but there were critics. Lucas: There were. A few analysts and journalists had raised questions about Autonomy's accounting practices before the deal. For example, they pointed out that Autonomy's gross margins were suspiciously high, and that some of their revenue seemed to come from low-margin hardware sales that were being dressed up as software licensing. But those concerns were either dismissed or not fully investigated during the due diligence. Luna: So the board might have been relying too much on the assurances of the CEO and the advisers. Lucas: That's a fair reading. And that's one of the lessons that governance experts take from this case. Boards need to be willing to challenge the narrative that management presents, especially when the deal is complex and time is short. But there's another layer here. The board's chairman and CEO at the time, Léo Apotheker, was himself a controversial figure. He was brought in to turn around HP, and the Autonomy deal was supposed to be his big strategic move. Luna: And it ended up being the nail in his coffin. Lucas: Exactly. Apotheker was ousted just a few weeks after the deal closed. And then the board brought in Meg Whitman, who had been on the board and was a former eBay CEO. She was tasked with cleaning up the mess. So the board had to manage not only the writedown but also a leadership transition. Luna: That's a lot of balls in the air. How did Whitman handle it? Lucas: She took a very different approach. She was more measured, more willing to acknowledge that the company had problems. And she was the one who ultimately decided to split HP into two companies, Hewlett-Packard Enterprise and HP Inc., which happened in 2015. That was a huge strategic decision, and it was driven partly by the need to streamline the business and partly by the recognition that the old conglomerate model wasn't working. Luna: So the board's legacy is not just the Autonomy deal, but the painful restructuring that followed. Lucas: Right. And this is where I want to bring in a point about what the board actually does in a crisis. They're not just making decisions; they're also managing their own reputation and the company's credibility. In the Autonomy case, they had to balance legal strategy, shareholder communication, and internal morale, all while the company was bleeding value. Luna: It sounds like a crisis management playbook. Lucas: It is. And one of the most telling moments came later, in 2018, when the UK's Serious Fraud Office dropped its investigation into Autonomy's former executives. That didn't necessarily vindicate the board, but it did complicate their narrative. The SFO said there wasn't enough evidence to prosecute. So the board's claim of fraud was left unresolved, at least on that front. Luna: So the fraud allegations remain a he-said, she-said, at least in the criminal realm. Lucas: Exactly. There was also a civil case in the US, where HP sued Autonomy's former CEO Mike Lynch for fraud. And that case, interestingly enough, went to trial in 2024. Lynch was acquitted on all charges. So the board's central claim, that they were defrauded, was rejected by a jury. That's a massive blow to the narrative that the board had maintained for over a decade. Luna: Wow. So the board was not just criticized, they were essentially proven wrong in court. Lucas: In that case, yes. But here's the nuance: the acquittal didn't mean that Autonomy was a clean company. It meant that the prosecution didn't prove fraud beyond a reasonable doubt. And the board's due diligence was still criticized by many experts. So it's a complex legacy. The board's handling of the crisis was not a clear success, but it wasn't a complete failure either. Luna: What do you think is the biggest takeaway for other boards? Lucas: I think it's that boards need to be more skeptical, especially in high-stakes deals. They should be willing to push back on management's enthusiasm, to ask hard questions about the numbers, and to ensure that due diligence is not just thorough, but also independent. And when things go wrong, they need to be transparent about their own role in the failure, not just blame others. Luna: That's a tough pill to swallow, especially when you're a director and you want to protect the company. Lucas: It is. But the Autonomy case shows that the cost of defensiveness can be higher than the cost of admitting mistakes. The board spent years defending a narrative that ultimately fell apart. And in the meantime, they lost the trust of investors and the public. That's a lesson that goes beyond HP. Luna: And it's a lesson that's still relevant today, especially with all the AI deals happening. Lucas: Absolutely. When you see companies acquiring AI startups for billions of dollars, you have to wonder, are they doing their due diligence? Are they looking under the hood? The Autonomy case is a reminder that even the biggest companies can make catastrophic mistakes when they get too comfortable. Luna: So what's the final word on the HP board's handling of the Autonomy writedown? Lucas: I'd say it's a cautionary tale about the limits of board power and the importance of humility. The board had all the tools, but they still got it wrong. And their response, while aggressive, didn't fully restore their credibility. It's a reminder that in the boardroom, the most important thing is asking the right questions, not just having the right answers.