237. The extraordinary story of Britain’s first tech titan

0:09Hello and welcome to The Rest is Money with me Steph McGovern and ho ho ho ho from me Merry Christmas I mean, that was exceptional. The enthusiasm in that. Ho, ho, ho. Yeah, we've got a bit of a Christmas treat for you today for this episode. So this is an episode where I think you'll want to sit with a cup of hot chocolate and a mince pie or a brandy, whatever takes your fancy, because this is a staggering story that we're going to deliver to you today. So this is about Mike Lynch, Robert, isn't it? So just remind everyone who he is. Yeah. So as you say, this is a sort of podcasting glorious technicolor about a sort of larger than life individual who had a very tragic death on his super yacht in Italy.

1:05and the reason why this was absolutely front page news was because really of his life story as a tech entrepreneur, as somebody who was sued by one of America's most famous tech companies who accused him of ripping them off. This was Hewlett Packard who sued him. And, you know, and there was an amazing amount of courtroom drama. He thought he was going to go to prison. He didn't go to prison. And then literally weeks after getting his life back on track was this extraordinary tragedy that didn't just lead to his death, but the death of some of his family and friends. And then there was another extraordinary coincidence involving a completely separate death of one of his closest business colleagues.

1:55This is the stuff not of dry business. This is the stuff of, I don't know, almost Shakespearean tragedy. It's astonishing. Yes, and all ripe for a good book. And so for this episode, we've got with us Katie Prescott, who is the technology business editor at The Times, but more importantly, has written a book about all of this with extensive research, hundreds of interviews, talking to family and friends and people who worked for him and going through all the court cases and everything else to write what she calls the curious case of Mike Lynch. So here is our interview with Katie Prescott.

2:39Katie, it's lovely to see you. You're an old colleague and mate of mine and Robert's, aren't you, from BBC Days? There's a bit of a production chain here because I used to produce you back in the day when I started at the BBC. And of course, you used to produce Robert. There we go. God almighty. Intimations of mortality here. This is very depressing. Let's get on. Let's move on. Business unit reunion. Yeah. So, I mean, Robert and I have talked about Mike Lynch on the podcast before because his story, I mean, is ripe for a book because it is incredible. But just give us a sense of like why he is so significant and why, you know, you decided to write a book about him.

3:18Yes, Mike Lynch, I think it's fair to say, was a tech entrepreneur before being a tech entrepreneur was really cool. And as you know, in the UK, we're not renowned for churning out enormous tech businesses at all. We're very good at starting them. We're very good at coming up with interesting tech ideas, but not very good at scaling them and not growing them to the extent that Mike Lynch did with his business, Autonomy. me. So he was at university in the 1980s, a time when computing was really taking off. And he was a passionate engineer, really, really interested in tech. And at a time when a lot of his peers were going to the city during the Big Bang to make a lot of money from Cambridge, where he studied, he decided to stay on and get into the world of tech.

4:06And just because I think this is relevant to his story, he wasn't a posh boy, was he? He's absolutely right. Yeah. So he was born to Irish immigrant parents, lived first of all in East London, and then they moved to Essex. And he was incredibly bright. And that was spotted from an early age. And he won a scholarship to a private school where he did really well. And his peers said to me that he was just seen as one of the brightest boys of his year. So as you say, sort of not an establishment figure. And I describe him in the book as an outlier. and we can come on to his obsession with probability in a bit.

4:43But yes, he then went on to Cambridge and again, took a sort of different path to everybody else by staying on. And never what you might call a very nice person. That's the impression I got from your book. I have to say that was one of the things that I struggled with, writing the book in the very sensitive aftermath of his death and the tragic death of his daughter and others on the boat. But it was something that emerged very quickly when I started interviewing people. I've never covered anybody like this who was so polarizing and such a Marmite figure. People were quite wary of talking to me about him, which was the first red flag that something was a bit strange and were very keen to know what my angle was when I was writing the book.

5:32And when I said, well, I don't really have one, I'm just trying to uncover more about him because I think he's a fascinating figure. It's very hard to cover tech as I do without coming across businesses that he was involved in. But yes, certainly he was a ruthless man and he could also be a bully. And just to kind of take it back a bit then, I mean, he started his first business, didn't he, when he was like 16. So he always had kind of the commercial side of life in his mind, as well as the interest in the tech and the science and that, which is quite unusual. Really unusual. He certainly wasn't the sort of tech entrepreneur who was quietly coding and geeking away in his bedroom.

6:10He always had lots of friends, had girlfriends. He was really, really into music and started a band both at school and at university. That was his first business. He was really interested in music tech and he started a synthesizer company in the 80s called Lynette Systems, which was a smush of his name and his friend from school, Richard Burkett, who also later joined him at Cambridge. So they were doing this little side hustle, making synthesizers and trying to get them manufactured really right up until he finished his PhD. Did it do all right then? The accounts have fallen off company's house, but having spoken to people around him, I think they were quite pleased that they never had to raise any money, he said, to do it.

7:03Yeah. So he became, I mean, I wouldn't say exactly a public figure, but the creation and flotation on the stock exchange IPO of autonomy in that immediate post dot com bubble era was a big deal. Because, you know, all the dot-com giants, certainly the ones that had longevity, were American. And Britain just seemed way behind the curve. There were sort of software businesses like Sage, but they just seemed relatively small. fly. And then you get this business autonomy that is so brash and so confident. So tell us a little bit about how and why he created autonomy and what it did. To Steph's point about him not sort of being a typical tech geek, I think that, and the word brash used, I think it's absolutely spot on.

8:16He could always spot the commercial potential of tech. So this is not someone who's just making something interesting just for them. He could see how to sell it. And crucially, that if you were going to make a big splash in the tech world, that you needed to have a presence in America. And very, very early on, before the company was even public, he made sure they had a foothold in the States. He had an uncle at the time who was living there, who opened an office for him. So he had a vision, I'd say, of where he wanted to take the business. So Autonomy was a search company used by businesses. Mike Lynch used to say he could have invented the next Google, but he'd been advised by tech analysts at the time that that wasn't going to be a successful business model.

9:01So he decided to sell the tech, the software into companies. And it was, of course, of time when stuff was becoming more computerized, there was more and more information and his software allowed companies to search through it in a very simple and more sophisticated way than just using keyword search. So he was, unlike a lot of the dot-com businesses at the time, selling something tangible that was actually making money. But it is interesting when you look at the flotation in London. He floated the company three times from 1998 to 2000, But when he finally floated it in London, it was valued at£4 billion and the revenues were£44 million.

9:45So really... And that's the total... We're not talking about profits here, just so people understand. That's right. So, you know, this is an extraordinary multiple of what the business was actually producing. And, you know, you either take the view, which actually quite a lot of people in the city did take, that it's all bullshit or you think this has got the most amazing growth potential. Exactly right. And because of that massive valuation, it went almost immediately into the FTSE 100, so Britain's top listed companies, and then almost immediately fell out of it again when the dot-com bust happened.

10:23And so Mike Lynch and his team spent the next decade really trying to build that share price back up. But it was something, I mean, he used to talk about the dot com um companies at the time as you know bring toothpaste to my door dot com like there were lots of businesses that were just starting websites and weren't really making anything and him and his team really did have tech that that they were selling which is kind of quite on quite unusual and this you know we were talking about his profile as well this really kind of enhanced his public profile as well didn't it because then he you know joined the bbc board and sponsored tottenham hotspots and things like that yeah absolutely i mean this really, really propelled him to being, I'd say, a member of the establishment in some ways, although he never saw himself like that.

11:10But being on the BBC board, later being an advisor to David Cameron's government, he was Ernst & Young's Entrepreneur of the Year, winning lots and lots of accolades. And his profile went from being slightly on the fringes of the entrepreneurship pages at the time to being in the Financial Times and the profile that comes with being a chief exec of a big British listed business. And he didn't always welcome that. And it was interesting doing the research, how his attitude seemed to change towards the press from being pretty benign, I would say, in the late 90s when he started autonomy to when the company was listed and press coverage became more critical.

11:56There was far more scrutiny, as you'd expect, on the business as a listed company. And he got very, very riled quite frequently by some of the more negative press coverage about him. He was pretty thin-skinned. But it wasn't just negative press coverage. I mean, one of the things, you know, we'll get on to the, actually the succession of catastrophes that befell him, his business, and ultimately it's a really upsetting story, his family. but one of the things that I don't understand and I just wonder in researching your excellent book whether you've got an insight into is the sort of gap between the perception of the business and the reality a gap that shouldn't have existed because a well-established huge American business Hewlett-Packard decided that autonomy was worth a multiple of what I think most serious analysts would have said was, you know, the fair value that they, you know, why did they massively overpay?

13:08I mean, because they were, you know, they had every sort of kind of top advisor you could think of working for them, whether we're talking about auditors, accountants, you know, banks and all the rest of it. How do they all get it so wrong? There's a lot to unpick there. I call the book The Curious Case of Mike Lynch. I think one of the curious cases is exactly that. Why when there were questions, not only when you were looking at the business in the early 2000s, but actually towards the end of the 2000s, particularly starting in around 2009, when Mike Lynch really had clashes with city analysts over his accounts although no one quite knew what was going on and maybe the extent of what was going on until far later.

13:53Hewlett-Packard did 18 days due diligence on the business before they bought it. Some of those city analysts who questioned Autonomy's accounts even wrote them emails afterwards to say, do you know what you're doing? But they didn't speak to the city analyst, Hewlett-Packard, and they didn't speak to some of the tech analysts because I think that's the other question here is the quality of the technology. So it is curious. What happened is that they were convinced there were other buyers on the table. The Hewlett-Packard itself had been having a particularly torrid time over the few years leading up to 2011 when it paid$11 billion for autonomy.

14:40It had cycled through chief executives that had made terrible acquisitions that they'd had to make enormous billion dollar write downs on. And they saw autonomy. The new boss, Leo Apotica, who was a German software guy, so he was looking for something in the software industry to try and zhuzh up Hewlett-Packard's, call it a dinosaur, but more old fashioned technology, which is kind of printers and ink, plumped on autonomy. And then there was this race, but it transpired really. He was in a race against himself to try and buy it. It had been shopped around. It had been shopped around, but nobody wanted to touch it.

15:20And actually, one of the bizarre things in this story is, you'll know Larry Ellison, the famous boss of Oracle, the Silicon Valley giant. They were one of the businesses that were approached by Autonomy's team to buy the company. And Mike Lynch said this later on, and that they'd looked at it. And Larry Ellison said, this is not true. He tried to shop the business to us and we didn't want it. And then he put the accounts online under the URL, pleasebuyautonomy.com. He put out a press release saying another whopper from Mike Lynch. You know, he's quite a punchy guy, Larry Ellison. World second richest man.

16:02Yes, he was briefly the richest man, wasn't he? He was quite recently. Earlier this year. Yeah, yeah, yeah. So really, it's a bizarre story. But, you know, you were talking about your analysis of his company, Robert. He would have described you as a twit in a suit. That's how he thought of people in the city. I didn't wear a suit, but there we go. Just a twit. Really? Well, this is.com, remember. Of course. So, you know, he really felt that as a tech entrepreneur, he was creating something tangible. He was making jobs. You know, he was doing something to change the world. And actually what he was facing as the boss of a listed business was people like you who were sort of trying to take him down and criticize him and the rise of the hedge funds who were using his share price, you know, to make money for themselves.

16:46And I think he found all of that frustrating. But he had form for kind of embellishing the truth, didn't he? Because it wasn't in one of his first companies, you know, you write about this fictional finance director called Frank Bridges. Tell us about that. I rather loved this. And I sort of don't particularly want to draw a line between Frank Bridges and what happened necessarily with Autonomy's accounts, because I do think it's also part of the charm of the sort of fake it till you make it entrepreneurial story. But yeah, in his sort of first major company, Cambridge Neurodynamics, which was the company that Autonomy spun out of, when they were based in a co-working space in Cambridge, they created a finance director called Frank Bridges.

17:32So if someone rang up the office to say, can I speak to Frank? They'd know they were chasing an invoice and mysteriously he was never there. But in terms of the really sort of dodgy business, and, you know, there are weirdly ambiguities around, you know, whether this was sort of allowable under the existing rules. But one of the things that you write about that they did to inflate their profits, and this was... Well, revenue. Or revenue, rather. Yeah, revenue, not profits. But it's, well, connected, obviously. Is this technique they used of if they worried that when they were going to produce their quarterly results, revenues were going to fall short of what they'd flag to the city they should be, they would basically invent a sale to what are known as resellers.

18:33But the thing is, that's not a proper sale because the resellers aren't buying the software for their own use. It's just a way of parking it. but you can create the illusion of revenue. And this was a technique that they used, well, for some time, didn't they? For some time. And the most information we have about this comes from the court cases that HP led against autonomy, which look at the period from basically 2009 onwards. It's not particularly clear what happened before that. But essentially, yes, at the end of the quarter, if they had a sale that they thought was going to go ahead. And often it would be a sale that they'd had negotiations about, right?

19:19So it wasn't like completely pulled out of the air, but I don't know, say you're the BBC and we're negotiating a deal and actually it doesn't come off by midnight on the 31st of March. They would ring up a reseller and say, would you take this deal? The problem came when that deal hadn't actually been signed. When the BBC ultimately just decided not to do it. And the judge in the case said, you know, this didn't have commercial value. Mike Lynch used to talk about there being a difference between accounting standards globally and in America over when you could register the sale. But the point was, if it had no commercial value, it had no commercial value.

19:59And that then created a hole in the accounts. and speaking to people at the business, they said it almost created like an addiction, whereby it meant that they would hit their numbers, but not really. And then they were trying to constantly fill it in the next quarter. So just remind us, because you said this came out in the court case, tell us how this business ended up going to court then. What happened with Hewlett-Packard after that? Yeah, then maybe just a little bit of the chronology here. So when does Hewlett-Packard buy autonomy? What does it pay for autonomy? And then how quickly does it decide it is massively overpaid?

20:37In August 2011, August the 18th, which is relevant later for the story, Hewlett-Packard bought Autonomy for more than$11 billion. Almost immediately, Leo Apotica, the chief executive who'd made the decision to buy Autonomy, who'd built the relationship with Mike Lynch, that German software boss, you've got two European software guys who were planning to work together, was pushed out by the board, which was very, very anxious about the price that was paid for autonomy and whether this really would be the silver bullet to change Hewlett-Packard's business. He was replaced by a lady called Meg Whitman, who was the chief executive of eBay.

21:21And it is fair to say that her and Mike Lynch hated one another. They just did not get on at all. They could not have been more different types of people. You've got this kind of maverick, entrepreneurial guy. He's never had a boss before, really. And then Meg Whitman, who liked everything by the book. I did know him a bit. He's sort of intriguing for an entrepreneur because he felt very closed to me. He felt a very private person. Do you know what I mean? I don't know if this came across in talking to the people you interviewed, but quite often entrepreneur, obviously he was a brilliant salesman because he managed to manufacture a ludicrous price for his own business.

22:00but he's not what you'd think of as, in my experience, because he's not flamboyant. He wasn't an extrovert. No, and a fierce negotiator though, by all accounts, in terms of getting that price for his business. I was speaking to one of his bankers the other day and they said, you always knew if you're going into a meeting with Mike that he would absolutely ruthess and you needed to have your wits about you. But yeah, a private person, quite a charming person because he seemed very... Yeah, he wasn't. I never saw the bullying. I just thought he was a bit closed, perfectly pleasant, but I can't claim I had any sort of amazing insight into him.

22:37Didn't he have piranhas in one of his reception areas? Yeah, that was in the early days. Yes, yeah. He was fascinated by James Bond and meeting rooms named after Bond villains as well, notoriously. No, there were all sorts of quirks about autonomy. But him and Meg, yeah, they had a falling out, didn't like each other. Then there was one moment in early 2012 where autonomy didn't hit sales figures and Lynch didn't tell Meg Whitman until the last minute and she fired him. After that happened, a whistleblower, and this was the second autonomy whistleblower, there had been one a few years before who tried to speak out to Mike Lynch and his board and didn't get anywhere.

23:20A whistleblower called Joel Scott spoke to HP's lawyers and started talking to them about what was going on within the accounts. And that's when they started digging. And a few months later, there was this bombshell announcement that HP was writing down the value of autonomy by over$8 billion. You buy a business for$11. And then you're saying it's now worth$3. $3, yeah. Yeah. So that's a lot of, and this wasn't the first write down that HP had had to do as well, that was worth billions. So not, yeah, not a happy time and a massive kind of blow, obviously, to Lynch and his team and really just kickstarted more than a decade of very, very painful legal proceedings for everyone involved.

24:12It was also hugely damaging for HP. I remember at the time just thinking actually I mean how could they possibly have been so stupid I mean you know it's I mean you know we'll get on to you know the damage to you know the reputation and the finances of the autonomy people but you just felt I just remember a time thinking I mean I just thought suckers I just thought, what the hell did you get yourself into here? Right. Well, let's hold the story there, Katie, and find out what happened next after this quick break.

24:59Welcome back to The Rest Is Money with me, Robert Peston. And me, Steph McGovern. And also with us, Katie Prescott, who is the author of The Curious Case of Mike Lynch. So before the break, Katie, you left us on the cliffhanger of Hewlett-Packard writing down the value of autonomy by, as you say, over$8 million. What happened next? This just sparked so many court cases, it's quite difficult to get your head around them all. But the first one was Hewlett-Packard being sued by its own shareholders over the acquisition. They're saying you just should never have done this deal. Which is to my point about how humiliating it was for HP.

25:39Yeah, it's a very fun document to read actually from the shareholders where they go over a lot of the kind of criticism that had been leveled at Autonomy over the past 10 years and some of the mistakes that they said had been made in terms of the due diligence or lack of. At the same time, I think there was a little bit of poking the bear from Mike Lynch as well. There was a famous article in the FT at the time where someone from Autonomy described working for HP is like being waterboarded. And he always used to say that it was like working for the civil service, that the reason that the acquisition hadn't worked out was that autonomy hadn't been integrated properly.

26:24And it had been like an orphaned asset, he described it within Hewlett Packard. So it's not just you have the shareholder case, but also like a very acrimonious relationship between the main players, which I think also just added fuel to the flames. Then Hewlett-Packard sued Mike Lynch and his chief financial officer Sushivan Hussain in London. The case was looked at by the serious fraud office that thought it basically wouldn't be able to come to a conclusion on it, so pushed it out to the Department of Justice in the US, which picked it up. I think one of the things that's really, really painful about this is just how long all of this litigation took.

27:11And actually, it's still going on here in the High Court in London, but we can get to that. So the trial finally started of Mike Lynch and his CFO, Sushivan Hussain, in 2019. So bearing in mind the sale happened in 2011. And at that time, Sushivan Hussain had started his criminal trial in the US for fraud. And he was sentenced to prison almost exactly as the trial started, the civil trial. So rather than being put in prison, the H.P. Hewlett-Packard was after money here, was after recompense. So he was sent to prison. And I think that was a moment in 2019 that things really felt very, very serious for Mike Lynch.

27:59And I think he started to take the whole thing far more seriously, his friends told me, than perhaps he had before. Because, you know, he, I think, had slightly dismissed this American giant for, you know, having misappropriated the business, but also mismanaged that acquisition. And why was the finance director found guilty so much earlier than the criminal trial of Mike Lynch? Question I had as well. I wondered why the DOJ didn't go after both of them at the same time, which might have made sense. It's not entirely clear. I think they wanted to try for the CFO first. And then once they got him, it was after that sentencing that they started to pursue Lynch.

28:48and he always fought his extradition from the UK. But is it actually plausible to you that the finance director was responsible for stuff that Mike Lynch wouldn't have known about? No, and having spoken to a lot of people around them and also read the civil court judgment, which was categorical in what the judge decided. And bearing in mind, he's a very experienced chancery judge who took two years to come to his conclusions. no Mike Lynch always said he wasn't a details guy you know he wasn't into the finances anyone who dealt with him that I've spoken to completely disputed that he was very you know brilliant and absolutely across the numbers and so now we're at the point where Mike Lynch has been extradited then along with the vice president of finance Steve Chamberlain what happens next That was an extraordinary moment.

29:45So Steve Chamberlain never fought extradition. He was sort of Sushivan Hussein's deputy in Cambridge managing the accounting team there.

29:57I've known the former Tory minister, Tory MP, David Davis for years. And David Davis takes the view that it was appalling that he was extradited. And I think others are still campaigning on this, actually. They are. Are they right? I think there's more of a question about whether a criminal jury trial is the right forum to look at something as complicated as a software accounting case, really. I mean, actually, most of Autonomy's revenue came from the US, did have a big operation there, and Hewlett-Packard is an American company. So it seems to me there was an obvious reason why the Americans were interested.