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HP-Autonomy Deal: What NR Narayana Murthy could have taught us
HP's $8.8 billion write-down on its Autonomy acquisition came as a big surprise to everyone yesterday. HP, under its former CEO Leo Apotheker, who wanted to transform the company into a higher-margin software services business bought Autonomy, a British software company for about a billion dollars last year. Its present CEO Meg Whitman said Autonomy had misstated its accounts, and it has requested USA's SEC and UK's Serious Fraud Office to open civil and criminal investigations on the firm. Autonomy founder Mike Lynch, who got rich by 800 million thanks to the sale, has denied the allegations. Apotheker who led the acquisition said he was stunned and disappointed and offered his help to get into the bottom of this.
HP said it was audited by two big names - Deloitte and KPMG, and that Deloitte did not raise any red flags. HP's stock price plunged by 12% following the news. Could investors have foreseen this? It looks like some did. Guardian's financial editor Nils Pratley wrote that the size of the acquisition - $10 billion for a company with revenues of $1 billion, and the context - Apotheker was under intense pressure to do something fast - should have made HP cautious.
Reuters pointed out to specific issues that analysts and fund managers have raised in the past.
As early as 2009, hedge fund manager Jim Chanos had identified Autonomy as a shorting opportunity, according to a source familiar with his views. Chief among his concerns, according to the source, was that Autonomy was claiming a 40 percent market share against the likes of Microsoft Corp, International Business Machines Corp and EMC Corp in the field of e-discovery. Autonomy's stated margins of around 50 percent did not seem to translate proportionately into cash flow; and it was reporting double-digit organic growth in software license revenue while rivals battled shrinking sales, the person said.
During a presentation a few weeks ago entitled ‘Faking Reported Income 101' at the Santangel's Investor Forum in New York, hedge fund manager John Hempton of Sydney, Australia-based Bronte Capital highlighted items on Autonomy's balance sheet that raised his concerns. "Is it odd that in a software company you have receivables of 4.5 months? Or that deferred revenue is under half receivables?" asked Hempton, who has a short position on HP.
FT pointed out to two more: Canaccord Genuity and Berenberg. Analysts with these firms said were inconsistencies in revenue growth versus deferred revenues, cash generation versus reported profits, and accounts receivables versus announced deals. The column advised its readers to pay attention to cash.
Very true. It looks as if analysts who looked at cash were not surprised, and those who didn't, were. And that's something NR Narayana Murthy often says: Profit is just an opinion, cash is a fact.
Grand simulation of brain & Cognitive Systems Era
"The project is code-named Compass, and its initial goal is to simulate the brain of the macaque monkey (commonly used in laboratory studies of neuroscience). In sheer scale, it’s far more ambitious than anything previously attempted, and it actually has almost ten times as many neurons as a human brain." Thus, New Yorker on IBM's recent announcement
Here's Dharmendra S. Modha, of IBM Labs, on the cognitive systems era