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Vatican dispute sheds light on HP case in troub

led Autonomy deal
The Vatican has become enmeshed in a struggle between Hewlett-
Packard Co and Michael Lynch, the former CE of the !" software co
m#any $utonomy Cor# bought by HP in %&'' in a deal that led to a bi
g loss for the !( technology giant)
$n argument o*er the #ro#osed use of $utonomy+s software to hel#
digiti,e the Vatican+s library #otentially lends su##ort to HP+s accusati
on that $utonomy booked sales e*en when the intended end user had
not decided to buy the software)
-n the end, the Vatican says it did not #urchase the software for the
library #ro.ect from $utonomy or from a reseller of $utonomy+s #rodu
cts, MicroTechnologies LLC) /e*ertheless, $utonomy booked 0'')11
million in re*enue based on the sale to MicroTech of software that wa
s earmarked for the #ro#osed Vatican deal, according to sources famil
iar with HP+s in*estigation)
$utonomy+s booking of re*enue tied to a Vatican deal that didn+t ha
##en illustrates one way in which HP contends the software com#any
ga*e a distorted im#ression of how ra#idly it was growing, these sour
ces said
$ source familiar with $utonomy+s business at the time counters tha
t its a##roach to booking re*enue in such transactions with resellers
was #ermissible under !" accounting standards and blessed by its au
ditor 2eloitte)
HP took an 03)3 billion im#airment charge in /o*ember %&'% for it
s 0'')' billion #urchase of $utonomy) The si,e of the loss, and the s#e
ed with which it occurred, marks the deal as one of the most disastrou
s done by a ma.or com#any in recent years)
$ letter seen by 4euters shows that Vienna, Virginia-based MicroTe
ch, wrote to the Vatican library, 5iblioteca $#ostolica Vaticana 65$V7,
on $#ril %8 this year seeking #ayment for the 0'')11 million of $utono
my software)
MicroTech CE and #resident $nthony 9imene, said in the letter th
at in March %&'& $utonomy had re:uested it buy the software in %&'&
so that MicroTech could ;#artici#ate as a reseller; in a #ro.ect betwee
n the library and $utonomy)
9imene, said MicroTech was sur#rised to see an announcement fro
m another com#any, 9a#an+s /TT 2ata Cor#, in March this year statin
g that it had been selected to conduct the Vatican library+s digiti,ation
#ro.ect) He asked the Vatican library if $utonomy software had been u
sed in the /TT contract or any other such #ro.ect, and, if so, when wa
s #ayment made for that software and who recei*ed it
<e are writing to you to con=rm your recei#t and use of the softwar
e and to obtain #ayment for that use,; said 9imene, in the letter)
-n res#onse, Vatican library #refect Monsignore Cesare Pasini sent
a letter to HP in which he said MicroTech+s assum#tion that $utonomy
software was being used in the #ro.ect ;is absolutely false); He said th
e #ro.ect uses software from /TT 2ata and others but not anything fr
om $utonomy and MicroTech)
Pasini added that the Vatican library has ;ne*er dealt with MicroTec
h);
HP declined to comment on how it res#onded to the Vatican letter)
MicroTech >eneral Counsel $aron 2rabkin said that 9imene, was n
ot a*ailable for comment)
HP said late last month it #lans to #ursue claims against Lynch and
$utonomy+s former chief =nancial o?icer (usho*an Hussain) The #reci
se nature of such claims and when HP might =le them could not be lea
rned)
$uthorities, including the !( 9ustice 2e#artment, the !( (ecurities
and E@change Commission and the !"+s (erious Araud ?ice, are als
o in*estigating HP+s accusations against $utonomy+s former to# mana
gement
$ lawyer for Hussain did not res#ond to re:uests for comment)
The MicroTech claim to the Vatican for #ayment lea*es key :uestion
s unanswered) -t is not clear why the reseller agreed to buy the softwa
re for a #ro.ect that had not been awarded, and why the Vatican had n
e*er heard of MicroTech+s in*ol*ement)
(truck on the last day of the =rst :uarter of %&'&, the MicroTech de
al was crucial in allowing $utonomy to meet market e@#ectations for t
he :uarter, with re*enue B which was boosted by ac:uisitions B comi
ng in at 0'CD)% million, u# about 1& #ercent from a year earlier) $naly
sts+ consensus forecast was for 0'C8 million) -t was on the basis of suc
h growth that HP when it ac:uired $utonomy was #re#ared to #ay a E
C #ercent #remium to its stock market *alue
-n the end, HP wrote o? 0%)8 million on the sale to MicroTech beca
use of non-#ayment to HP by the reseller) That is according to an inter
nal email, dated ctober '%, %&'', from $utonomy+s accounts de#art
ment to counter#arts in HP that has been re*iewed by 4euters) 5y tha
t date, HP owned $utonomy
$utonomy+s deal with MicroTech is among a series of transactions t
hat are being :uestioned by HP following its in*estigation, the sources
familiar with the #robe said
HP declined to comment on the s#eci=cs of the Vatican deal but sai
d in a statement that more generally ;former senior $utonomy manag
ement used numerous tactics to misre#resent the re#orted =nancial m
etrics of the com#any); -t said that this included $utonomy recogni,in
g re*enue on transactions that ne*er closed and misidentifying catego
ries of re*enue to ;create the illusion of a high-growth com#any); The
result was that in*estors and HP were misled, HP alleged
$utonomy+s former management belie*es HP is misre#resenting th
e nature of a few deals that don+t in any way add u# to the amount of r
e*enue that HP claims was :uestionable, according to the sources fam
iliar with $utonomy+s business at the time)
!nder -nternational Ainancial 4e#orting (tandards, se*eral condit
ions must be met before a com#any can book re*enue from the sale of
goods to a reseller) These include the condition that ;signi=cant risks
and rewards or ownershi# of the goods; has been transferred to the b
uyer, and the seller ;retains neither continuing managerial in*ol*emen
t to the degree usually associated with ownershi# nor e?ecti*e control
o*er the goods sold
Lynch belie*es that this was clearly the case with the MicroTech s
ale, according to the source familiar with $utonomy+s business at the t
ime) MicroTech made its own commercial decision to buy the software,
and was therefore like any other customer for $utonomy, the source s
aid, adding that whether that software ended u# with the Vatican or n
ot was an issue for MicroTech and not $utonomy)
$mbrogio Pia,,oni, *ice #refect of the Vatican library, told 4euters
that it had worked with $utonomy on a feasibility study that lasted u#
to a year-and-a-half) 5ut he said around the summer of %&'' B .ust be
fore $utonomy+s ac:uisition by HP B$utonomy sto##ed showing inter
est in the #ro.ect, #utting o? a##ointments, though it did not formally
withdraw
$ccording to documents #re#ared for $utonomy+s audit committee t
hat ha*e been seen by 4euters, 2eloitte re*iewed the deal and it was
satis=ed the sale to MicroTech had taken #lace and could be booked b
y $utonomy)
-n a statement 2eloitte said it ;categorically denies that it had any k
nowledge of any accounting im#ro#rieties or misre#resentations in $u
tonomy+s =nancial statements
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