Launch successful business partnerships

On November 20, 2012, just a year after its $11.1 billion purchase of British data company Autonomy, high-tech giant Hewlett-Packard (HP) announced that it was taking an $8.8 billion write-down and a huge quarterly loss in connection with the deal. According to HP CEO Meg Whitman, a lengthy investigation by HP had determined that Autonomy had engaged in “a willful, sustained effort” to inflate its revenue and profitability prior to the sale, the Wall Street Journal reports.

HP linked more than $5 billion of the write-down to Autonomy’s alleged improprieties and has reported its findings to authorities in the United States and Britain.

Autonomy founder and former CEO Michael Lynch immediately rejected HP’s allegations and promised to prove them false. As the accusations fly, the question of whether HP took too great a risk in purchasing Autonomy looms large. Within HP, impulsive negotiations, internal conflict, and a lack of financial accountability contributed to an agreement that didn’t stand the test of time.

Acquisitions, mergers, and other forms of partnership agreements often fail to meet parties’ expectations, many times because of lapses during the negotiation stage. Following a postmortem analysis of HP’s missteps, we offer several guidelines to help you discern which opportunities with other organizations to pass up, which to pursue, and how to set the stage for success.

A risky deal
Back in September 2010, HP made the surprising announcement that it had hired a little-known German software executive named Leo Apotheker as its new CEO, replacing Mark Hurd, who was fired in the wake of a personal scandal. For years, HP had suffered from sagging sales and low morale due to a failure to innovate in the manner of its rivals, including Apple and IBM.

During talks with Autonomy’s Lynch early in his tenure, Apotheker became convinced that a partnership between the two companies could get HP out of its slump. Autonomy produces software that allows corporations to search voice mail, texts, and video for patterns.

In an impassioned presentation to HP’s board, Apotheker acknowledged that acquiring Autonomy would be a risky move, given that the company had a steep price tag. But he called on the board to “hold hands and go through this together,” according to Fortune magazine. Apotheker argued that acquiring Autonomy would allow HP to make a splash in the software market and give it much-needed focus.

Some within HP reportedly had heard rumors about accounting irregularities at Autonomy. But neither Deloitte LLP, Autonomy’s auditor, nor KPMG, which HP hired for an additional review, found any evidence of material accounting problems.

To Apotheker’s shock, HP chief financial officer Cathie Lesjak urged the board not to approve the acquisition on the grounds that it was too expensive and against HP’s best interests. Though the board was shaken by her warning, 10 of the 11 directors voted to approve the acquisition.

A rocky start
On August 18, 2011, HP shook the tech world with a multipronged announcement: It was pulling the plug on its disastrous TouchPad tablet computer, exploring the possibility of spinning off its flagging PC business, and acquiring Autonomy—not to mention lowering earnings projections for the year.

It was Apotheker’s decision to link the Autonomy announcement with other HP news. When a PR operative argued in advance that such a complicated announcement would be disastrous, Apotheker “flew into a rage,” according to Fortune. The board of directors unanimously supported the CEO’s plan.

HP shares plunged by 20% the next day. Observers thought HP had “gone mad,” Fortune wrote. The Autonomy acquisition was off to a rocky start.

Within a month, Apotheker was out, replaced by HP board member Whitman, the former CEO of eBay. Although Whitman had complained about the price of Autonomy, she had voted in favor of the acquisition.

After the acquisition, Lynch tried to isolate Autonomy from its new parent for fear of losing its entrepreneurial spirit, the New York Times reports. Whitman largely left the tech company alone. Autonomy’s sales plummeted, but possibly only because after Autonomy joined HP, the truth about the company’s sales could no longer be hidden with accounting gimmicks.

In May 2012, Lynch left HP. That same month, an anonymous whistleblower at Autonomy informed HP that Autonomy executives had been cooking the books prior to the acquisition. HP sent a team to England to investigate.

The saga of HP and Autonomy suggests three rules to keep in mind when you are negotiating and planning partnership agreements with other organizations.

Rule #1: Require accountability
HP made a risky choice in hiring Apotheker, who had a low profile in the industry and lacked experience running a large corporation. CFO Lesjak was critical of his argument that a deal with Autonomy was in HP’s best interests. However, HP’s reporting structure did not require its CFO to sign off on the deal, and the board rejected Lesjak’s advice to take a pass on Autonomy. Whitman later blamed HP’s reporting structure for HP’s failure to identify Autonomy’s alleged accounting fraud.

It’s only natural for executives skilled at setting strategy and building relationships to take charge of the dealmaking process. But the HP-Autonomy negotiation attests to the importance of requiring financial accountability when considering an acquisition or partnership agreement with another company.

Rule #2: Plan implementation with care
As HP’s leaders negotiated how to announce the Autonomy deal, they appear to have failed to devote much time to planning how
Autonomy and HP would integrate and what synergies the two companies could realize.

In a recent article in Tufts Magazine, Tufts University professor Jeswald W. Salacuse notes that negotiators typically fail to plan carefully for the implementation stage of their agreement. Salacuse advises negotiators to develop a list of questions about how the deal will function in the real world and to prepare a tentative implementation plan that specifies “who does what, when, and how.”

The tendency of many organizations to allocate negotiation to specialized teams exacerbates disconnects between dealmaking and implementation, writes Salacuse. At General Motors, for example, teams charged with negotiating foreign joint ventures would move from one deal to the next, leaving other executives to figure out how to run the new partnerships. Because negotiators were rewarded financially for closing deals, they had an incentive to overlook potential implementation issues.

To avoid this pitfall, give negotiators strong incentives to come up with workable implementation plans for their deals, advises Salacuse. And once a deal is done, require leaders on both sides of the new partnership to meet regularly to set their agenda and review their progress.

Rule #3: Don’t partner out of desperation
When an organization is in trouble, a common temptation is to eye prospective partners as potential saviors. Though new relationships can rejuvenate a stagnant enterprise, they can also cause existing problems to spiral out of control. When the relationship fails, the new partner can even become a convenient scapegoat for the organization’s more deep-seated issues.

Whenever your organization is considering a new partnership, do an in-depth analysis of the potential risks and benefits, being sure to factor in shortcomings and challenges on both sides. You may determine that there are better ways to get your internal house in order than launching a potentially costly and distracting new enterprise.