Checker's lawyers are seeking half a billion dollars for the "irreparable damage and harm" caused by the Chubby Checker, an app for Hewlett-Packard's Palm OS platform. "This lawsuit is about preserving the integrity and legacy of a man who has spent years working hard [editor's note: HA!] at his musical craft and has earned the position of one of the greatest musical entertainers of all time," explained lawyer Willie Gary.

The lawsuit alleges that the egregious and flagrant acts of Hewlett Packard and Palm, Inc., if not stopped immediately, will permit Defendants to enjoy profits to which they are not entitled.

There’s a lot going on in the recent Wall Street Journal story about how Hewlett-Packard “missed a chance to back away” from its acquisition of Autonomy – which HP now thinks did a lot of revenue recognition fraud and on which it has taken zillions of dollars of writedowns – but this description of the board’s approval process for the deal is the only thing you really need to know:¹

HP directors and bankers calculated how much revenue Autonomy would have to add over 10 years to justify such a price. Autonomy’s trajectory alone wouldn’t get there. The deal required assuming more revenue growth as a result of the tie-up than HP usually assumed in acquisitions, said people familiar with the matter. But the directors believed they could make the numbers.

Those calculations were done without knowledge of the alleged fraud but who cares? Here is, roughly, HP’s thought process:

• The price that Autonomy demands is X²
• Autonomy’s DCF value is Y₁ based on expected revenue growth but no synergies
• Y₁ < X
• Well but the DCF value is Y₂ with regular-to-aggressive synergies
• Y₂ < X
• Well but … well we could make up another number Y₃
• Y₃ >= X
• LOOKS GOOD.

If you notice that current revenue numbers are made up, then that changes Y₁, but Y₁ isn’t an input into Y₃ – the actual value that HP put on Autonomy – because that number was also just made up. “Synergies” was just a plug to get the equation to balance. The bankers’ math in the board book to approve the deal was just there to be soothing – directors get twitchy³ if they can’t look at a football field slide while approving an acquisition – not to have an impact on the outcome. You can hypothesize that HP would have rejected the deal if it had known Autonomy’s true revenue situation, because then the valuation numbers wouldn’t work, but that is a silly hypothesis because even using fake⁴ revenues the valuation numbers didn’t work and it didn’t reject the deal.

That is too glib – off by a lot is worse than off by a little, and “oh you’re a massive fraud actually” is a great point to make in negotiating down the asking price – but I think it’s the right analysis. As Usha Rodrigues writes, “The die was cast on the Autonomy acquisition when the HP board picked Apotheker, a CEO ‘bent on a high impact acquisition.’” If you have a CEO who really wants to do a deal, and a deal he really wants to do, it’s hard to imagine that some accountant coming to him with some minor boring technical quibble like “all these revenues are fictitious” would cause any more trouble than – well, than some banker coming to him with some minor boring technical quibble like “the price you are paying is more than the discounted cash flow of this asset to you.” Shut up, nerds! We’re doing important CEO business here!

How should this make you feel about the social value of M&A? Sort of same as you always felt? Some deals are good and some are bad, and CEOs tend to like making acquisitions because they are optimists and doing acquisitions makes them feel like big shots, and boards should try to shut down acquisitions that are bad for shareholders, but sometimes they don’t because country clubs etc. Everyone knew that already; this anecdotal confirmation is pleasing but, after all, just anecdotal. I’m sure HP’s current CEO would never do an acquisition that might destroy shareholder value.

How should it make you feel about Dragon Systems? Dragon, you’ll remember, sold itself for stock to a company that turned out to be a giant fraud and whose stock turned out to be worthless; Dragon’s shareholders then went out and sued their ragtag team of junior investment bankers at Goldman for not noticing that the acquiror was a giant fraud. And one of those junior bankers testified that they did a “great job” for Dragon, insofar as “We guided them to a completed transaction.” This got them made fun of a lot, here and elsewhere, but you get the sense Apotheker would approve. Dragon’s, and HP’s, bankers saw themselves as service providers, providing a particular narrow service – roughly, transaction execution – and leaving other services (auditing, fraud detection) to other providers, or no one, as the case may be. It was clear – to the bankers, and HP, though perhaps not to Dragon – who was in charge of the deal, and it sure wasn’t the bankers.

One popular and reasonably promising path to medium-term success as an investment banker is to tell clients what they want to hear. This is good because then clients will find you pleasant to be around; it’s also good because what they want to hear is frequently “oh yeah you should totally do this transaction that involves paying investment banking fees.” So there’s a synergy there. CEOs, after all, tend to (1) want to do stuff, (2) want to do big stuff, and (3) have a high degree of confidence in their ability to make investing decisions. If those decisions are systematically biased toward destroying shareholder value … well, I mean, we just work here, y’know?

Also, the Journal had an article about the flood of stock buybacks analysts expect this year.

Inside HP’s Missed Chance To Avoid a Disastrous Deal [WSJ]

1. Though you should read the rest because it is pretty entertaining? Like this is good:

HP became aware that bloggers and some financial analysts had claimed in the past that Autonomy was aggressive in its accounting. HP asked Autonomy’s [CEO] Mr. Lynch about how his firm recognized revenue, receiving answers and documents that allayed concern, said HP General Counsel John Schultz.

Bloggers! That happened right after the acquisition agreement was signed, as did this: “[HP board chairman Ray] Lane spoke to senior HP executives and found a near-universal view that their CEO wasn’t right for the job.” Imagine being a board chairman and sidling up to like the CFO and saying “hey, everything good with this Apotheker dude?” and the CFO saying “no he’s horrible you have to fire him.” And you’re like, hmm, that’s discouraging. And you check in with the COO and hear the same thing. And then you ask everyone and get “a near-universal view that their CEO wasn’t right for the job.” Never mind the big acquisition you just signed. “Gee, you know that information really would’ve been more useful to me YESTERDAY,” you might find yourself thinking.

2. Which we’ll take as a given: it’s a 50% premium to market price, which “wasn’t unusual for a software deal.”

3. For “twitchy” read “sued.” Imagine that the rest of this footnote discusses the negative effects of Smith v. Van Gorkom on, like, life, and its positive effects on investment banking M&A advisory revenues.

4. This footnote runs the global “allegedly” macro. I have no idea. Lynch remains adamant that there was no monkey business at Autonomy.

• Morgan Stanley Finalizes Its Entry In The “Who Said The Worst Things About Its Own Products?” Competition
• Hedge Fund Manager Will Get Chance to Fulfill Dream of Spending Hundreds of Millions of Dollars Badly
• Bank Investors Push For Change Via Strongly Worded Poll Responses

An internet service provider which seeks to benefit from the safe harbor provisions of the DMCA is required, as a condition of receiving such protection, "expeditiously to remove, or disable access to, the material that is claimed to be infringing or to be the subject of infringing activity." .... Certainly the thrust of the DMCA is to relieve internet service providers of the initial need to ascertain the copyright status of the sound recordings that they make available, to place the burden of asserting copyright ownership on the owners of such copyrights, and to require the internet service providers to "take down" infringing material, upon receipt of a valid notice of infringement. There is no textual, or other reason, to think that Congress intended to limit that distribution of responsibilities to only post-1972 recordings.

Moreover, the phrase "copyright owners,".... is applicable to the owner of a common law copyright, no less than to the owner of a copyright under the Copyright Act....

This Court is not attempting to extend the Copyright Act to pre-1972 Recordings, but, nonetheless, does find, based on the relevant language of the statutes and the analysis discuss above, that the safe harbor provision codified by section 512(c)(1) of the DMCA is applicable to Pre-1972 Recordings.

In the first of the three cases, HP was so persistent in the litigation and so threatening, that the individual, who had retired from HP months before even talking to Cisco, withdrew. There seemed to be little concern with the stress that a big company turning its legal guns on an individual can cause. In another case, an employee who worked in HP’s financial services group was sued to block her from working in Cisco’s customer finance group, even though there was no argument whatsoever that relevant intellectual property at stake. She persisted and HP relented. In the most recent case, just last week, the employee, who’d given HP over two decades of loyal service, had moved to California before starting work at Cisco. He asked a California court to declare that he was protected by California law and that HP could therefore not enforce its non-compete. A court hearing was scheduled in California, we notified HP and HP retained counsel. Cisco also reached out to senior legal staff at HP to try lay out some voluntary steps to avoid further litigation and to give further reassurance that the employee wouldn’t even inadvertently leverage any HP confidential information.

HP’s reply was to file an action in Texas against the employee and schedule an “emergency” hearing to try to enjoin the employ from working with Cisco, seeking to have a judge issue the injunction with no notice and no opportunity for the employee to be represented. Fortunately, an eagle-eyed Texas lawyer working for the employee saw the filing appear on line and showed up in court. Given that the matter was already in front of a California court, with HP fully represented, in a hearing scheduled for two hours later, the judge in Texas was not impressed by HP’s effort to get her to act without a hearing. She refused to proceed. And the California judge issued an order allowing the employee to begin his new career at Cisco.

Cisco’s promise to those looking to work in the networking industry is that no matter which of the fifty states you live in and work for Cisco, if you come to work for us we will apply California’s rule in favor of employee mobility nationwide. We know that employee retention is a matter of fair compensation and career opportunity, not litigation. And we challenge HP, with new leadership deeply steeped in Silicon Valley’s environment of mobility and opportunity, to step up and support employee freedom and stop suing employees just for leaving.

From HP:

"It's a fast innovation cycle and a fast imitation cycle in this market, so we just know that we have the creative engine here to continue to build on what we have, and we'll keep innovating, we'll keep honing and those guys hopefully will continue to see the value in it and keep following us by about a year."

RIM (Blackberry) responds.

"Well, when you’re trying to optimize user experience that juggles multitasking, multiple apps open at once and on a small screen, you’re going to get people landing on similar kinds of designs."

• My experience with a portable power strip helping me make friends at various airports and conferences.
• Our research director, Mike Ho's creative uses for dental floss.
• Analyst Joyce Hung's surprising value in an exercise ball.

• My experience with a portable power strip helping me make friends at various airports and conferences.
• Our research director, Mike Ho's reliance on his whiteboard
• Analyst Joyce Hung's surprising value in an exercise ball.

While in this study we focused on the problem of predicting box office revenues of movies for the sake of having a clear metric of comparison with other methods, this method can be extended to a large panoply of topics, ranging from the future rating of products to agenda setting and election outcomes. At a deeper level, this work shows how social media expresses a collective wisdom which, when properly tapped, can yield an extremely powerful and accurate indicator of future outcomes.