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Deal Lawyers Mostly Mum on HP's Ill-Fated Autonomy Acquisition
The Am Law Daily
First a pretexting scandal, then the abrupt departure of a CEO, followed by the dismissal of his chosen successor, and now an $8.8 billion write-down as a result of an ill-fated acquisition. For Hewlett-Packard, the bad news just keeps coming.
The Palo Alto-based computer and information technology giant announced Tuesday that it has asked regulators in both the U.S. and U.K. to probe alleged financial improprieties involving British software company Autonomy, which HP acquired for $11.1 billion last year, according to sibling publication Law Technology News.
As LTN noted when the acquisition was announced, the all-cash deal was the largest-ever in the legal technology sector, given Autonomy's role as a leading e-discovery and document management provider. But the acquisition about which some observers voiced skepticism, especially with regard to how much HP had agreed to pay hasn't turned out the way HP and former CEO Leo Apothekar envisioned.
After only 11 months on the job, Apothekar was fired as HP's top executive in September 2011 and replaced by former eBay CEO Meg Whitman. In the months that followed it became apparent that the Autonomy deal, which saw seven Am Law 100 and international firms play key advisory roles, was going sour.
Autonomy founder Mike Lynch left HP in May as part of an exodus of former Autonomy executives that included Andrew Kanter, who served as the Cambridge, England-based company's COO and general counsel. Kanter, who once practiced at now-defunct Silicon Valley firm Brobeck, Phleger & Harrison, is now with an investment firm called Invoke Capital, which Lynch launched this fall.
While Kanter was not immediately available for comment on the allegations of "accounting improprieties" and "outright misrepresentations" that HP has leveled against by Autonomy, the Irish-born Lynch has publicly refuted those claims in several interviews. Lynch claims that HP is merely trying to shift blame for its own mismanagement of the company. (Bloomberg reports that the Autonomy transaction is just one in a series of bad deals to make their way onto HP's balance sheet in recent years and that the company's explanation for its losses on the Autonomy acquisition are difficult to decipher.)
As for the many lawyers advising HP and Autonomy on their ill-fated union, most are staying mum. Reuters, The New York Times's DealBook, and The Wall Street Journal have reported that while the accounting and law firms that worked on the matter will likely face questions about why Autonomy's dubious bookkeeping is only now coming to light, it remains unclear who gets the blame for missing it in the course of due diligence. (DealBook also examined what future legal proceedings related to the HP/Autonomy matter might look like.)
One attorney on the periphery of the transaction who spoke to The Am Law Daily on the condition of anonymity says one potential problem inherent in putting together such large public M&A transactions is that they often come together quickly and in the heat of competitive pressure. "These deals often happen in a hurry," the lawyer says. "And then you've got to worry about other bidders."
Reuters reported at the time that HP's rivals might well come forward with competing bids for Autonomy. The company's sale to HP eventually closed in October 2011 and in the months that followed, several of the lawyers who worked on the transaction have moved on to new jobs.
Former HP general counsel Michael Holston left the company in December 2011, according to sibling publication Corporate Counsel. Four months after departing HP in a move that a knowledgeable source says was unrelated to the Autonomy acquisition, Holston was named chief ethics and compliance officer for New Jersey-based pharmaceutical giant Merck.
Holstona Notre Dame graduate and football fan who is no doubt enjoying his alma mater's rise to the top of the collegiate rankswon accolades at HP after joining the company in the wake of its pretexting scandal in 2007. The embarrassing episode, which involved spying on board members and journalists, allowed Holston to shake up HP's in-house legal department with some much-needed reforms by cutting costs and bringing on former Morgan, Lewis & Bockius colleague John Schultz, according to sibling publication The Recorder.
Holston, who was also credited with crafting a policy whereby HP would hire and train new in-house attorneys fresh out of law school, declined to comment on the HP/Autonomy matter through a Merck spokesman. Last month Holston was named to the board of the Ethics Resource Center in Arlington, Virginia.
David Healy, cochair of the M&A practice at Fenwick & West, was named as HP's interim general counsel following Holston's departure. Healy declined to comment on HP's Autonomy-related legal issues when reached by The Am Law Daily.
When HP settled on Holston's full-time successor in April, the company installed Schultz as its new in-house legal chief. Like Holston, Schultz was a partner at Morgan Lewis, who joined HP in September 2008 after serving as chief outside counsel to the company during the pretexting probe.
HP said in a statement that Schultz conducted the company's internal investigation of Autonomy's finances along with global accounting firm PricewaterhouseCoopers. Schultz did not respond to a request for comment on whether HP has retained outside counsel in connection with its allegations against Autonomy. Two HP spokesmen also did not respond to similar requests for comment. (HP spokesman Michael Thacker declined to comment to LTN about the company's external advisers.)
In completing the Autonomy acquisition, Holston led an in-house team that also included deputy general counsel Paul Porrini and associate general counsel David Ritenour and Rick Arnold. None responded to requests for comment on the deal. Porrini left HP in August to become general counsel and secretary of Redwood City, California-based video advertising company YuMe.
Gibson, Dunn & Crutcher M&A partners Dennis Friedman, James Moloney, and Jeffery Roberts served as primary deal counsel to HP on its acquisition of Autonomy. None of the three responded to requests for comment and a Gibson Dunn spokeswoman referred The Am Law Daily's inquiry to HP.
Magic Circle firm Freshfields Bruckhaus Deringer, which served as European antitrust counsel and due diligence counsel to HP, declined to comment about its role on the transaction.
Drinker Biddle & Reatha firm where both Holston and Schultz worked before joining Morgan Lewis in 2005 served as special antitrust counsel to HP on the Autonomy deal. A Drinker Biddle spokeswoman did not immediately respond to a request for comment. (Holston helped recruit former Drinker Biddle partner Gregg Melinson to HP last year to become the company's deputy general counsel and vice president for global government affairs, according to Corporate Counsel.)
Skadden, Arps, Slate, Meagher & Flom corporate partners Peter Atkins and Kenton King, the latter of whom serves as head of the firm's Palo Alto office and coheads its global corporate transactions practice, did not respond to requests for comment about their roles advising HP's board of directors on the Autonomy acquisition. Skadden also provided tax counsel to the company on the deal.
Autonomy turned to Morgan Lewis and Slaughter and May for outside counsel on its sale to HP. Slaughter and May M&A partners Stephen Cooke and Gary Eaborn did not respond to requests for comment about their roles advising Autonomy. Nor did two spokeswomen for Morgan Lewis, which also advised Autonomy last year on its $380 million acquisition of the digital archiving, e-discovery, and online back-up and recovery businesses of Boston-based information management company Iron Mountain.
William Myers, a former technology M&A partner at Morgan Lewis who took the lead for Autonomy on the Iron Mountain deal and the company's subsequent sale to HP, left the firm in October to become general counsel of Palo Alto-based venture capital firm Norwest Venture Partners. Myers, who also once worked at Brobeck, declined to comment about Autonomy when reached by The Am Law Daily.
Also declining to comment: White & Case, which acted as counsel to investment bank Qatalyst Partners, Autonomy's lead financial adviser its acquisition by HP.
In accusing Autonomy of cooking its books, HP claims it relied on opinions from Big Four accounting firms Deloitte Touche Tohmatsu and KPMG, with KPMG hired to audit Deloitte's review of Autonomy, according to public statements by HP's CEO Whitman.
A KPMG spokesman tells The Am Law Daily that contrary to media reports, the global accounting firm "performed limited, non-audit work for HP on this matter. Because of our professional obligations and client confidentiality, we cannot discuss our engagement further without HP's consent."
Deloitte said in its own statement provided to The Am Law Daily by Deloitte spokesman Jamie Harley that the firm "was not engaged by HP, or by Autonomy, to provide any due diligence in relation to the acquisition of Autonomy."
"Deloitte UK was auditor to Autonomy at the time of its acquisition by HP," Harley says in the statement. "Deloitte's most recent audit opinion on Autonomy's financial statements was for the year ended 31 December 2010 and was signed in February 2011."
Adds Harley: "Deloitte categorically denies that it had any knowledge of any accounting improprieties or misrepresentations in Autonomy's financial statements. We conducted our audit work in full compliance with regulation and professional standards. We are unable to discuss our audit work further due to client confidentiality. We will cooperate with the relevant authorities with any investigations into these allegations."
Deloitte's former general counsel, Joseph Lambert, joined risk-consulting firm Kroll earlier this year, according to Corporate Counsel. The firm escaped a class action suit this week related to its audits of Longtop Financial Technologies, a Chinese software company listed in the U.S. that collapsed in 2011 as a result of a massive accounting scandal, according to sibling publication The Am Law Litigation Daily.
As for Autonomy, LTN notes that the 17 percent of the e-discovery market it held among Am Law 100 firms last year has since fallen to just 4 percent, according to the most recent technology survey by The American Lawyer.