M&A The HP Way – Why the Autonomy deal was doomed, and what can’t be done to save HP

The latest debacle at Hewlett-Packard involving the allegations of accounting wrong-doing at Autonomy make for a particularly sticky wicket for CEO Meg Whitman. While there have been some attempts to blame her predecessor, Léo Apotheker, for the decision to buy Autonomy, it’s impossible for Whitman to avoid taking ultimate responsibility for the deal. And when the dust finally settles on this latest in a series of miss-steps at HP, the question of what can be done to save this storied Silicon Valley icon from itself will be harder and harder to answer.

Part of the problem is that even if Autonomy had knocked it out of the park, instead of fouling out, it never would have turned HP around. Not even close. The fact that it’s now another big HP deal gone bad just adds to the sense that all we can do is watch a Greek tragedy unfolding on stage before our eyes.

Whitman’s blame problem starts with the fact that the Autonomy deal was on the table even before Apotheker showed up, and became a component in the strategic planning for the company pretty much from day one of Apotheker’s short reign. Considering the board’s role during the interregnum between Mark Hurd’s departure and Apotheker’s appointment, the board, of which Whitman was a member, had to have been considering, if not vetting, the Autonomy deal during that period. So rather than blame Apotheker, Whitman has only to look to the HP board – of which she was a member – to find where the blame game starts, and stops.

The allegations of financial impropriety on the part of Autonomy have also to be taken into context in light of the failure of two other major acquisitions, EDS and Palm. With former CEO Mike Lynch making a spirited and public defense of his former company and its accounting, the fact the HP’s track record with big M&A is so poor weighs heavily in Lynch’s favor. Certainly, given that track record, it’s easier to think that HP and its board screwed up yet again rather than to think that the many audit firms and other companies and individuals charged with making sure the Autonomy acquisition was on the up and up were all simultaneously asleep at the wheel. Same with Lynch – I’d rather bet on HP’s board being wrong that on Lynch being foolish enough to publicly challenge allegations of financial misconduct that he knew were true. On the contrary : At this point I give him the benefit of the doubt, the circumstantial evidence indicts Whitman and the HP board more than it does Lynch and Autonomy.

It’s pretty clear that buying Autonomy at all  was a misstep, certainly in light of the fact that, at $10.3 billion, HP wasn’t likely to be able to make another big software acquisition unless its financial position improved significantly. Ironically, rather than being the architect of the Autonomy deal, Apotheker was initially lukewarm to it. And while the exact reasons for his initial ambivalence are not known to me, it’s clear that, regardless of the innate qualities of the deal, Autonomy wasn’t going to be big enough – in terms of strategic potential and revenue contribution – to move the needle at HP far enough to make the Apotheker era a success.

Part of the problem with Autonomy was that its revenues were simply too small to have the impact Apotheker needed to have. At the time the acquisition was on the table, Autonomy had just turned in fiscal 2010 revenues of $870 million. Not a bad number, but not enough for an acquiring company pulling in $120 billion a year. In fact, in order for HP to really start turning the corner, particularly in light of the fall-off in its printing, server, and PC businesses, and the on-going failure-to-execute problems with its services business, Apotheker needed to figure out how to add more than the equivalent of Autonomy’s annual revenue every month in order to do the job he was hired to do.

Hampering that target was the fact that the other M&A assets at HP that were supposed to be pitching in were in fact horribly behind in their own plans. EDS and Palm, which together were acquired for over $14 billion in 2008 and 2010 respectively, were underperforming at a depressing rate. While there was much optimistic talk by Apotheker and others about how Palm’s WebOS was going to be part of a unifying operating system fabric for HP’s PC, printer, and enterprise business, behind the scenes Palm was screwing up the development of the Touchpad so badly that it launched the clunky and inelegant tablet in July 2011 – in the face of a sleek iPad II launch three months earlier  – with little software and no real business plan. The result was an unmitigated disaster, a product with a great OS and an industrial, throwback feel that couldn’t run Netflix, read a PDF document or a Kindle book, or even surf the web very well (it runs an open source version of WebKit that performed only adequately at best.)

I was told later that year that a post-hoc analysis showed that HP would have had to spend hundreds of millions on WebOS just to get it to where it had a snowball’s chance in hell of competing with Apple. And considering that the Touchpad was not even a close competitor to the iPad, and had limited developer traction,  killing Palm and the WebOS market (okay, it was put out to pasture as freeware, pretty much the same thing) turned out to be the only merciful option.

Meanwhile, EDS kept missing its numbers mostly because the acquisition that was supposed to lead HP into the promised land of strategic enterprise consulting services was stuck in the past selling massive non-strategic outsourcing deals, or trying to. But because these deals were so huge, and so driven by commodity pricing considerations, EDS was losing enough of them every quarter – and not gaining the more coveted strategic deals in competition against the likes of IBM Global Services and Accenture – that it kept missing its numbers. And when you miss a couple of big deals in a quarter, you miss big. And EDS’ ability to help fix HP turned into another albatross draped around Apotheker’s neck.

It’s important to see that these two big deals were harbingers for the Autonomy fiasco, and not just because HP eventually wrote off $885 million of the $1.2 billion it paid for Palm and $8 billion of the $13.9 billion it paid for EDS. More importantly, in both cases, HP’s board, and its executive team, were simply unable to make these acquisitions effective, and integrated, parts of the company. The problems that led up to M&A failure being part of the HP Way were institutionalized before Apotheker showed up, and were so overwhelming that neither Apotheker in his year in office nor Whitman in her year of office could hope to have changed them.

The basic problem was – and remains — that there was no common culture, the HP Way being really many, different, and competing ways. The way of the servers, the way of the printers, the way of the PCs – it was almost comical how uncooperative these traditional HP business units could be with one another, much less with newly acquired assets. Of course, you can blame Mark Hurd for much of that anti-culture: he ran HP like a loose confederation of medieval city-states, each one competing with each other for the attention of King Mark, whose main concern was making his numbers, not building synergy or cooperation, and, God forbid, vision. The board, in case it’s not obvious, condoned this operating model as a way to keep investors on board.

King Mark also created a relatively hostile workplace, one that shocked employees from acquired companies who were used to a minimum of respect and a decent place to work. Not only did HP embrace a dehumanizing cubicle farm model housed in depressingly cavernous warehouse/offices, it provided no WiFi in its headquarters, no subsidized lunches for its employees, no regular janitorial services (this is not a joke – employees had to empty their own waste baskets!), and an amazing arcane accounting and HR system that demoralized the old-timers who stuck it out and horrified the newcomers who showed up on the M&A train.

Not surprisingly, employees of both EDS and Palm – and, later, Autonomy – made it clear they really didn’t feel they were part of HP. They continued to use eds.com and palm.com domains for their email accounts long after the acquisitions, and they acted as though the best thing for all concerned was to remain apart from the rest of HP. Having witnessed this studied apartness firsthand, and having seen the results of the internecine fighting inside the rest of HP, all I can say is that Autonomy was doomed from the start.

So, whether there were financial improprieties or not is pretty much immaterial in terms of judging whether buying Autonomy was a good idea or not. For Autonomy to succeed it would have had to buck the dominant anti-culture and pull off an amazing coup-de-finance that would have seen its revenues somehow driving a huge surge in new business for HP. That fact that it would have had to go against the real HP Way to do so made it look highly unlikely. The fact it would have to do that in a company that had just fired its second CEO in two years and had one of the most demoralized workforces in Silicon Valley – imagine the meet and greet with the new colleagues following Apotheker’s departure and Whitman’s ascension – was ludicrous.

Which brings us to the final, ultimate question: can anything be done to save this company? The answer is probably yes, as long as preserving shareholder equity is not an issue. But considering this is a public corporation, with a board that at least understands, if not practices, the concept of fiduciary responsibility, I see no way to make the HP of today greater than the sum of its parts. That ship sailed a long time ago….

…and, as befitting the Greek tragedy that is Hewlett-Packard, sank in the wine dark sea.