SAN FRANCISCO/NEW YORK/LONDON, Fri Nov 30, 2012 - For Leo Apotheker, the former Hewlett-Packard CEO, a July 2011 meeting with Autonomy founder Mike Lynch at a chic seaside resort in France was pivotal to his effort to remake a storied technology giant.

Apotheker was looking for a big, transformative acquisition, two people familiar with the situation said, and after overtures to several companies went nowhere, he set his sights on Autonomy.

After two months of negotiations on what was known at HP as "Project Tesla," Apotheker sat down with Lynch at a hotel in Deauville on the Normandy coast - and shook hands on what would become an $11.1 billion deal.

The Autonomy takeover was indeed a bombshell - but not in the way that Apotheker had hoped. When it was announced in August 2011, HP's stock plummeted amid withering criticism of the price tag. Within weeks, Apotheker was out of a job. Within months, Lynch and his new masters at HP were at war.

Inside a year, Lynch had been forced out and HP was investigating allegations of major accounting irregularities at Autonomy. That culminated in HP saying last week it was writing off more than three-quarters of the value of Autonomy, and telling US and UK regulators about alleged accounting fraud.

The implosion of the Autonomy deal has raised questions about how HP and its army of lawyers, accountants and investment bankers could have overlooked warning signs and gone ahead with the acquisition.

Reuters spoke with close to a dozen people directly connected with the deal or the accounting investigation. The picture that emerges is of a company so desperate to plot a new course that it may have been far too accepting of Autonomy's published and audited accounts.

It has also cast a shadow over Lynch, widely regarded as a brilliant but difficult executive; he left HP in May and has flatly rejected the company's claims of accounting shenanigans or that HP had been deliberately deceived.

CEO'S ROCKY REIGN

Apotheker's appointment as CEO of HP in November 2010 was greeted even at the time with head-scratching - and criticism. A veteran of the German corporate software maker SAP, he had no obvious qualifications to run HP - a company with sales several times SAP's - especially given his lack of experience in the computer hardware business.

But the US company was reeling from a series of boardroom imbroglios that culminated in the firing of then-CEO Mark Hurd in a sexual harassment scandal in August 2010.

Apotheker went on the acquisition trail almost immediately, even though previous HP takeovers like Compaq and Palm had not worked out well. He was given the mandate of moving HP in a new direction - software seemed logical given the decline in HP's traditional computer business - and felt the need for a transformative acquisition to do that, according to one of the sources.

He "knocked on a number of doors," according to another of the sources, looking as far and wide as the telecom software companies Comverse Technology and Amdocs, and corporate software maker Tibco Software.

It's not clear how far talks with those three progressed. According to one of the sources, HP backed off from Comverse because the company was not current with its published accounts and because of previously disclosed involvement in an options accounting scandal. HP could not agree on a price with Tibco, and Amdocs rebuffed it, saying the time wasn't right for a deal.

Spokespeople for Amdocs and Comverse declined to comment. Tibco did not respond to requests for comment.

Apotheker then set his sights on Autonomy. It was a pioneer in the up-and-coming field of "big data" - software that can separate the wheat from the chaff in huge mountains of corporate data - and could serve as a centerpiece for the new strategy.

This time, Apotheker was determined not to miss out.

He was "not being able to really have anybody dance with him at the right price," said the source with direct knowledge of the deal. "What happened is he talked to Autonomy and they got into a dialogue and he told the board that we have to do something," this person said. "It was out of frustration and desperation to a large degree."

HP began looking at Autonomy in earnest around May last year, bringing in investment bank Barclays as adviser. Boutique investment bank Perella Weinberg Partners had already been hired to look at ways of restructuring HP's businesses.

In early July of 2011 the board met to do a two-day review of the rationale behind the acquisition. During that process, the board set guidelines for the deal, including the price, and agreed on a process to do due diligence, two people familiar with the process said. It voted to enter into negotiations at the end of the two days.

DEALMAKER

Throughout the process, Apotheker remained in direct contact and consulted with HP Chairman Ray Lane, the person said, adding that Lane - a former top executive at software giant Oracle - encouraged management to proceed with the deal.

By the end of July, Apotheker and Lynch - who were previously acquainted because HP was an Autonomy customer - narrowed down financial terms at the hotel in Deauville, though didn't finalize the price.

Also present was then HP chief strategy officer Shane Robison, who has been credited by HP with being the main architect of many of HP's larger deals, including another troubled acquisition - its purchase of technology services firm EDS. Robison was pushed out of HP shortly after Apotheker left last year.

At the meeting, Apotheker presented HP's view about putting the companies together - with Robison chipping in when needed, one source said. Robison, who has not spoken publicly about Autonomy's accounting issues, did not respond to requests for comment sent to representatives at Fusion-io and Altera Corp, companies where he is a board member.

For some weeks, both sides went back and forth on the price, with Robison playing a pivotal role in pitching the deal internally, and getting it finalized. Inside HP, it was seen as Apotheker's and Robison's deal, the sources said.

In the end, uber-dealmaker Frank Quattrone, whose Qatalyst Partners was representing Autonomy, proved instrumental in securing for its shareholders the lofty price tag, according to another source familiar with the negotiations.

While the price haggling was going on, a large due diligence team numbering in the hundreds, including internal HP staff from all relevant departments like finance, poured over Autonomy's books, examined contracts, and interviewed Autonomy's top executives, sources said. External experts involved in the process included accounting firm KPMG, law firms and bankers.

Due diligence was seen being straightforward as Autonomy had been filing its accounts publicly and they had been audited. One source said the month-long process was extensive and meticulous but nothing special.

SHORT SELLER

During this time, HP posed a litany of questions to Lynch and Autonomy Chief Financial Officer Sushovan Hussain about accounting rumors surrounding the company, one of the sources knowledgeable with the deal said. But Autonomy executives provided explanations for all of them, this person said.

HP would not elaborate on the specific issues it raised. But questions about Autonomy's books had surfaced as early as 2009, when renowned short seller Jim Chanos identified Autonomy's shares as a shorting opportunity based on concerns such as how reported margins of around 50 percent did not seem to translate proportionately into cash flow.

His other concern was how it could report double-digit growth in software license revenue while rivals battled shrinking sales, according to a source familiar with his views.

Asked on CNBC last week about whether the board had discussed with Apotheker the speculation about Autonomy's books, HP's current CEO Meg Whitman said: "Not when I was on the board. What I do know is that after we announced the acquisition there were a number of blogs that came to the fore about potential issues at Autonomy. The former management team ran that to ground and came up with the conclusion that there was nothing there."

HP officials now say they were deceived.

Apotheker said last week he was "stunned and disappointed" to learn of Autonomy's alleged accounting issues. He declined to be interviewed for this story through a spokesperson.

As the deal was being considered, HP CFO Cathie Lesjak did raise questions about HP's ability to pay such a high price and whether it could integrate Autonomy well, sources said.

Lane said the board approved the deal based on the recommendation of management. "That recommendation was based on misleading audited financial statements and misrepresentations made by Autonomy's executives," he said in an email. "In hindsight, we shouldn't have done the Autonomy deal at such a high price. We were lied to and as a result, we got it wrong."

By the time the deal was agreed, though, Apotheker was already running out of time. He had wanted to sell HP's personal computer business but was unable to complete a deal. He announced a strategic review of the division - to the horror of many employees and the consternation of some of its customers.

That misstep, along with series of missed financial targets, led to Apotheker's firing in September 2011 - before the Autonomy deal had even closed. Board member Whitman - who had voted in favor of buying Autonomy - then took over as CEO. The acquisition still went ahead - and quickly went south.

BRUTAL CULTURE CLASH

The clash between HP's polite, slow-moving bureaucracy and Autonomy's in-your-face sales culture could not have been starker. Lynch also chafed at his new, subordinate position, according to the sources. He routinely shut HP management out of key decisions and - true to his company's name - resisted full integration with HP. He complained constantly about red tape.

After he was forced out in May of this year, Lynch returned to HP in June to discuss severance. But he found himself on the receiving end of a barrage of questions about Autonomy's accounting, sources briefed on the investigation told Reuters.

HP General Counsel John Schultz quizzed Lynch specifically on a range of accounting items, including at least three sales deals from a couple of years before, one of the sources said. Lynch's reply to most questions was that Deloitte, its auditor, signed off on various items, or he could not remember specifics.

"If there were no problems, he could have explained it," one of the sources said. "He simply refused to have the conversation."

But Lynch was caught unaware: Hence he did not have information about those deals at hand, said a source familiar with his version of events. Lynch's spokeswoman said that the allegations HP made last week "were not put to him in June."

The legal struggle has only just begun. HP has handed documents over to the US Securities and Exchange Commission and the UK Serious Fraud Office, and the US Department of Justice is also involved, a source told Reuters last week.

HP also on Tuesday threatened legal action against parties involved, though stopped short of naming targets. HP has challenged Lynch to answer questions under penalty of perjury.

"He ran this company like a small private company, he was involved in all facets of the company, he was extremely hands on," said a source close to the matter who knew the former Autonomy CEO. "For Lynch not to know about this, if it is truly happening, would be far-fetched."