Autonomy deal fallout 'more extreme' than hoped, says HP's UK boss

"Any acquisition you make, there’s always things that aren’t quite right. It was a bit more extreme than we’d hoped, clearly,” says Andy Isherwood, managing director of Hewlett-Packard UK and Ireland, displaying a gift for comic understatement.

He is discussing Autonomy, the British software company HP bought for $11.7bn (£7.2bn) three years ago, and then wrote down the value of by $8.8bn little over a year later, a heavy blow announced alongside allegations of accounts fiddling against its founder Mike Lynch. The scandal is still playing itself out in an increasingly bitter public war of words that appears destined for courtroom combat. Lynch denies wrongdoing and has blamed the debacle on the shortcomings and instability of HP management.

He certainly has plenty of context in which to base his version of events. Leo Apotheker, the German HP chief executive who plotted the Autonomy deal, was ousted in a boardroom coup immediately afterwards, less than a year into the job. His predecessor, Mark Hurd, had been forced out by a sexual harassment and expenses investigation.

Apotheker’s plan to move HP away from its traditional stronghold in computer hardware and towards high-margin software, with Autonomy as the spearhead, was then immediately abandoned by his replacement, the former eBay chief executive Meg Whitman. She had joined the HP board after a failed run at the California governorship, and on stepping into the top management job scrapped plans to offload the company’s PC business.

While all this was going on revenues were falling, HP was losing market share and it had been left behind in the smartphone revolution. Its reputation as an innovator had also suffered, as the research and development labs were “starved” of investment, says Isherwood.

While most technology giants sailed through the recession relatively unscathed, between April 2010 and the Autonomy write-down in November 2012, HP lost more than three quarters of its stock market valuation. From a peak of $128bn, shareholders saw more than $100bn wiped out.

It was the most troubled period in HP’s long history. The company is celebrating its 75th anniversary this year and its founders Bill Hewlett and Dave Packard are credited as being among the founders of Silicon Valley. Yet for all its recent problems it remains one of the titans of the global technology industry, with revenues of nearly $112bn last year.

Isherwood, an HP lifer who has been with the company since 1988, was forced to watch the turmoil from the sidelines. He had worked closely with Mark Hurd as global chief of software sales but a health scare meant 18 months out of action watching two changes of chief executive and the unfolding of the Autonomy nightmare.

When he was fully recovered, Whitman asked him to help sort out Autonomy and then last October take charge of HP’s British business, which, with revenues of £5bn, is second only to the US. “I didn’t sit back and think 'crikey, it’s all going to rack and ruin’ but it was clearly not heading in the right direction,” he says.

Many HP observers were highly critical of Apotheker’s reign. The former leader of the German enterprise software company SAP wanted HP to leave its heritage as a computer maker behind. While investors griped, his ideas were perhaps most unpopular inside the company.

“When Leo came, clearly there were some signs that things weren’t going quite right,” says Isherwood. “What I was amazed at was what effect one person can have on a company in a fairly short period of time.”

Returning on the front lines of the company he joined as a graduate, Isherwood was welcomed with a live grenade in the shape of an Autonomy battered by the accounts scandal and an exodus of sales staff. “I had no input into the deal,” he says. “When Mike Lynch left, they asked whether I would get involved, because it was UK-based, and help work out what needed to be done.”

The Cambridge-based acquisition invented what amounts to a corporate search engine. It helps companies comb through so-called unstructured data such as emails, images and audio files that are often not usefully labelled and do not necessarily fit into the neat boxes defined in traditional databases.

In spite of HP’s allegations that Lynch and senior Autonomy management inflated revenues with phantom deals and hidden low-margin sales, Isherwood liked what he found. Technologically at least it was a good buy, he insists.

“If you divorce the financials and the governance from actually what the Autonomy assets are, they’re just brilliant assets for what we want to do and where the market is going,” says Isherwood.

“I think that accounts stuff is all going on in a parallel universe. At the end of the day it’s got the HP brand behind it now and we don’t walk away from things.

“The plan is to integrate it fully and that was the plan after Mike left. Prior to Mike leaving it was kept pretty independent.

“As soon as he left it was ensconced within the organisation. We bought a new sales leader in and a bunch of new people. We also transferred a lot of HP people into the business to get it integrated more. I think it’s done well. We’re seeing clearly a lot more customer buying so it’s not an issue with the product.”

Asked why Autonomy was not integrated and did not perform under HP ownership during the seven months Lynch — a divisive figure in the City during his tenure as a FTSE 100 chief executive — remained in charge, Isherwood responds with only a question and a smile. “Under Mike’s leadership?”

Unsurprisingly, he has only good things to say about the leadership of Whitman, Lynch’s nemesis. She is nearly two years into a five-year plan to turn the HP oil tanker, with increased investment in research and development, and a focus on the big trends of cloud computing, mobile working and big data as part an attempt to turn HP’s scale and diversity to its advantage.

“HP is a broad-based company,” says Isherwood. “Meg understood that immediately. At that time we had said we were going to hive off the PC business, but she came in and said 'no’, the power is in the broad portfolio.”

“She didn’t necessarily understand technology back to front but she had enough of an understanding and, more importantly, listened really intently and wasn’t scared of problems.”

“The thing I’ve seen come back in the last three years is that innovation. I think we’d lost sight of that – HP makes great things.”

Investment in research and development is good for HP UK, which spends a quarter of the $4bn budget, mostly at its site in Bristol. Some of the 500 graduates the company is recruiting this year will end up there. There has been plenty of pain too, however, with 1,100 job cuts announced in December, part of a cull of 34,000 worldwide.

The axe has come down hardest on HP’s outsourcing business. It got into IT services in a big way six years ago when it bought EDS, a company that had grown on the back of massive government contracts. The Department for Work and Pensions paid it nearly £660m in 2010 on various long-running deals, for instance.

Now, following sharp political criticism of big outsourcers and a new technology spending discipline in Whitehall, including a Cabinet Office ban on new contracts worth more than £100m, public money is harder to come by and fewer people are needed by HP.

“The services business has definitely changed. There are fewer seven-to-10-year outsourcing deals worth £Xbn. Have we exited some people that we don’t have a need for in certain businesses? Yeah, we’ve had to. We’ve always been in a position of a very strong balance sheet and been able to make the adjustments early. Our cash flow at the moment is $3bn a quarter. You can do a lot with that. We never get to a point where we don’t make difficult decisions and if you don’t you either go bust or you get acquired.”

Despite the decline in outsourcing revenues, a global trend, HP surprised Wall Street last month with 1pc revenue growth – its first in a dozen quarters – on the back of increasing share of the PC market. The UK picture was better still, with only outsourcing in decline. After falling last year overall sales here are on track to grow 7pc, says Isherwood.

“After a difficult period, our return to growth here in the UK is testament that people want HP to be successful, that we can be successful and more importantly we are relevant for the new world, not just the old world. For me having a big business here is great; being relevant is more important.”