/// The Red Flags That Were Obvious — To Some — In the HP-Autonomy Deal

November 22, 2012  |  All Things Digital


The one big, glaring question that will probably never be fully answered in the still-developing HP-Autonomy scandal is this: If buying Autonomy has so obviously turned out to be a bad deal 15 months after it was first announced (and don’t forget that Autonomy’s founding CEO Mike Lynch rejects everything HP says ), why weren’t there any red flags that could have warned HP before the deal was consummated? It turns out there were, and a few smart short-sellers — the most obvious one is Jim Chanos of Kynikos Associates , who in the last 24 hours has been hailed as a bit of a god of short-selling wisdom on CNBC — who read the situation correctly and made money. There are others who saw troubles at Autonomy that should have occurred to HP’s due diligence team. One is John Hempton, of Australia’s Bronte Capital . In a blog post this morning he sums it up this way: Good software companies tend to have low receivables and higher unearned income on their profit/loss and balance sheets. At Autonomy, it was the reverse. Here’s a little Accounting 101: A receivable is a debt a company is owed and expects to be paid. If you buy a car from your neighbor and pay him half now and half next month, he’s counting on the fact that he’s going to be paid that other half next month. This is a receivable, and on a corporate balance sheet it goes in the assets column. This is how it tends to work for durable and tangible goods, which software is not. Software is usually sold for cash up front, and then any further payments tend to come from either service and support on an ongoing basis or, as in the case of companies like Workday or Salesforce.com, as subscription revenue.

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The Red Flags That Were Obvious — To Some — In the HP-Autonomy Deal



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