How to prevent M&A becoming a deal from hell

And that is not hyperbole.

By ansaradaWed May 20 2015Due diligence and dealmaking, Advisors, Industry news and trends, Virtual Data Rooms

The $11.7 billion takeover of British software maker Autonomy by Silicon Valley giant Hewlett-Packard, announced in August 2011, has damaged the career and reputations of chief executives and those who advised on the transaction, some 15 different financial, legal and accounting firms.

Hewlett’s CEO Leo Apotheker was fired just a month after announcing the transaction. Autonomy’s founder and CEO Mike Lynch, who owned 8 percent of the company at the time of the transaction, is being sued along with his former chief financial officer Sushovan Hussain for $5.1 billion by Hewlett.

It is one of the largest civil cases brought in the UK against British nationals. Hewlett has taken a $8.8 billion write down on the transaction. The company now alleges it overpaid at least $5 billion for Autonomy.

Mr Lynch and Mr Hussain sought to “artificially inflate” Autonomy’s revenue by leading a two and a half year effort to engage in “improper transactions and accounting practices,” says Hewlett. It calculates Autonomy’s revenues were about 25 percent lower than it reported in 2009, 38 percent lower in 2010 and 36 percent lower in 2011 and alleges its loss on the transaction is about $5 billion.

But Hewlett did not say such alleged activity would have caused it not to buy Autonomy. Hewlett chief executive and chairman Meg Whitman, who was a director at the company at the time of the deal, has said the board had relied on accounting firm Deloitte for vetting Autonomy's financials and that KPMG was subsequently hired to audit Deloitte.

Hewlett-Packard chairman, CEO and president Meg Whitman. Mr Lynch has told the Financial Times that Hewlett’s “claim… is… a desperate search for a scapegoat for its own errors and incompetence. The contents of the claim are a simple rehash of previous leaks and insinuations that add up to one long disagreement over accounting treatments, and have nothing to do with fraud.”  


Hewlett was advised by the New York-based boutique merger and acquisition advisory firm Perella Weinberg Partners and Barclays Capital. The law firms Gibson, Dunn & Crutcher; Freshfields Bruckhaus Derringer; and Drinker Biddle acted as the company’s legal advisors.

Hewlett’s board was advised by Skadden, Arps, Slate, Meagher & Flom.

Autonomy's financial advisors was the boutique advisory firm specializing in technology, Qatalyst Partners, as well as Goldman Sachs, UBS, Citigroup, JPMorgan Chase and Bank of America. The company’s legal advisors were Slaughter & May and Morgan Lewis.

Banking advisers on both sides of the deal were paid $68.8 million, according to data from Thomson Reuters/Freeman Consulting. Barclays was paid $18.1 million. Perella Weinberg was paid $12 million.

Given the vitriol associated with the deal, the obvious question is: did Hewlett’s and Autonomy’s advisors do a good enough job to earn those multi-million dollar fees? Moreover, did Hewlett’s board do its job in analyzing the transaction?

When Hewlett began to question the Autonomy acquisition the U.S. company could have sought to invoke every deal-breaker it could. But the advisors did not back such a course of action, unsurprisingly, because they would have be shorn of millions of dollars in fees. Hewlett’s advisor in the Autonomy deal, Perella Weinberg, advised Japanese camera maker Olympus' acquisition of British Gyrus, a transaction that prompted investigations in the United States, United Kingdom and Japan into fees and payments made by Olympus.

Olympus had hired Perella Weinberg to execute the transaction, which included a fee paid to "advisors" of $687 million - way beyond the usual scale for a transaction valued at only $2 billion. Perella Weinberg was not implicated in the matter.

Frank Quattrone of Qatalyst, represented Autonomy. Mr Quattrone previously worked at Morgan Stanley, Deutsche Bank and Credit Suisse. He helped arrange some of the biggest technology initial public offerings of the 1990s and 2000s, including and Cisco Systems, deals that won him a reputation as Silicon Valley's foremost investment banker. But Mr Quattrone faced charges that he blocked an investigation into initial public offering kickbacks during the technology boom of the late 1990s and early 2000s. After two trials failed to resolve his case, he ultimately reached a deal with prosecutors.


Luke Audsley, who has been involved in thousands of deals since 2010 when he began working at mergers and acquisitions specialist data room provider Ansarada, says if all the information from the deal is secured in the data room, disputes post deal closure may be limited.

Mr Audsley’s has three tips to avoid the kind of protracted ugliness that has engulfed Hewlett and its takeover target Autonomy. The first tip is to ensure that a complete archive of the transaction is available once a deal closes. “People tend not to care when the deal starts as to whether they need a compliance archive, says Mr Audsley. “It may not be deemed important at the time. But clearly a deal archive, a record of everything that went on in the data room during the deal, is crucial.”

His second tip is that all questions and answers in a merger and acquisition deal should happen inside a data room. “Some advisors still run Q&A outside the data room,” says Mr Audsley. “This makes it nearly impossible to track down all the conversations and emails the advisors may have had. If such conversations happen in a data room Q&A, there may be far fewer disputes post transaction.”

The third tip is that everyone involved in a deal must do everything possible to prevent document leaks. “If certain users are allowed to take documents outside the room, the documents and their subsequent usage can be tracked if a specialist M&A data room is used,” says Mr Audsley. “Downloaded documents, with such a M&A data room specialist, can be remotely tracked and destroyed.”

Caveat emptor - "let the buyer beware" - is a good principle in mergers and acquisitions. Ensuring that a complete archive of a deal, that all Q&A happens inside a data room and everything is done to prevent document leaks can save a company billions. More importantly, such actions can safeguard something more important: reputations.

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