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Default Is Microsoft Stuck With a Norwegian Herring?

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Even as it agreed in January to plunk down $1.23 billion to buy a promising but problematic search company in Norway, Microsoft knew that the company had some accounting matters to address.
Now, it appears, the acquired company, Fast Search & Transfer, may have some criminal matters to work out: Suspicions about the Norwegian search-engine company's revenue reporting are now in the hands of the Oslo police.
Norway's financial supervisory authority, Kredittilsynet, said its review of Fast Search's previously disclosed accounting problems not only appeared to have violated accounting standards, they may have broken the law too.
The development is bad news for Microsoft, which snapped up Fast Search as a potential Google-buster. Fast Search, which for a while was also known as the Google of Norway, had search-engine technology that industry experts said was better than Google's and could handle truly massive corporate projects.
Goldman Sachs estimated last year that the company would grow its revenue 27 percent in 2007. Over the years, Fast Search appeared to benefit from big contracts with customers such as AT&T, Comcast, and the Walt Disney Co.
At one point, Intel was interested in buying the Norwegian rising star, but Microsoft grabbed the prize. At the time, Microsoft was still digesting it $6 billion acquisition of the digital-advertising company aQuantive—a deal that came just one month after Google said it would pay $3.1 billion for DoubleClick.
In its haste to grab Fast Search, however, Microsoft looked past the company's problems: They include, but aren't limited to, accounting irregularities that began to appear as Microsoft began to look over its books.
In the second quarter of 2007, Fast Search reported an operating loss of $38 million on revenue of only $35 million—a full $20 million below forecasts. The loss widened in the following quarter, leading the Norwegian stock exchange to delist Fast Search on December 12.
That same day, Fast Search said it would review its accounting for all of 2006 and 2007. The latest unaudited results show revenue growth of 7 percent for last year, which is far below Goldman's forecast.
Still, Microsoft pursued the acquisition, completing the deal on April 28.
Kredittilsynet, the supervisory agency, was equally determined. It referred Fast Search to investigators at Økokrim, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime.
Økokrim last week concurred that the nature of the irregularities and the amount by which Fast Search apparently inflated its accounts were serious matters warranting prosecution. But the agency said it was too busy to open a criminal investigation.
Rather than let the matter rest, the market supervisor turned it over to the Oslo police for investigation. Aftenposten, a Norwegian newspaper, characterized Kredittilsynet's decision to involve the police as an unprecedented step in that country.
As of now, it's unclear what the Oslo police have in store for Fast Search—or for former company C.E.O. John Markus Lervik, who is now the vice president for enterprise search at Microsoft.

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