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Notes -
"Middleware-ish enterprise software company that does something related to like ... search maybe?"
This partially explains the tendency for overvaluation. Back in this time period, if you were selling SaaS and could point to big enterprise clients with 6-7 figure/yr annual spend, nobody looked under the hood that much more - especially if it was a "backend nobody really "sees" it that much" service.
It does not surprise me at all that some greedy founders probably realized this and started to slap all sorts of very optimistic numbers on everything.
There's definitely some of that going on, and HP certainly seemed primed to buy those optimistic numbers and then some. At one point HP internally valued Autonomy at a 40bn+ USD.
But allegedly the behavior here was Worse than hilarious optimism. From the Hussain (Autonomy CFO) trial appeal:
And there's a really big list of individual screwy behaviors (the Vatican gets involved! Twice!). While a lot of them were 'just' recognizing revenue earlier in sketchy ways, others look like pretty overt efforts to manufacture revenue or 'revenue' while hiding costs. I have absolutely no idea about the legality of this sort of accounting foolery in a public company normally, nor in the context of a sale/audit. Hell, I don't even enough about accounting to know if they're as clearly sketchy as they look at first glance -- as much as 'just write it all off' is rightfully a meme, there are a lot of ways to legally mess with numbers or have a 'pure software' company that's selling hardware at a loss for large portions of its revenue.
But even if HP was willing to make up whatever numbers would make that deal flow, Autonomy was willing to at least bend over backwards to give numbers making the company look like a better buy.
Awesome write up, thanks.
It does provoke some interesting thoughts about the threshold for fraud.
A ton of SaaS deals go south because when someone comes in to actually look at the quality of revenue, they realize it's a lot of handshake deals and one-off breaks that can't scale into a stable business. The term "growth hacker" is thrown around a lot in Silicon Valley and it's both true and too true. A startup, well funded, can "hack" its way to growth in ways that aren't the core of business; sell your shit for more than it cost to produce and satisfy customers. But then there's a point where, if the hack was too hacky, it's actually unrecoverable and it's better to pass on the deal. There's an analogy somewhere in here about when a codebase gets too fucked up to save, so you just throw out the whole damn thing and start from scratch.
A major issue at both the startup and 30 year blue chip S&P 500 component is tax code. Corporate and business taxes, layered with R&D treatment, amortization, and everything else means that companies often don't know how much money (in terms of free cash flow or even gross margin) they've made until a year or two after the transactions have occurred. Restating earnings is common enough, you just want to avoid doing it too often or have the restatement be too large. This is, in part, why so many public companies view success as "stock price go up," and why those intrepid souls who are willing to actually dig through the financial reports of a company (often known as "value investors") can make a nice chunk of change. Complexity is hard on its own, mind-numbing tax code complexity is an active deterrent to basic information analysis.
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