/ 8 March 2019

A market darling falls to Earth

A Market Darling Falls To Earth
(John McCann/M&G)

For almost two decades since EOH’s inception in the late 1990s, the IT management company was a market darling. But now buffeted by corruption allegations and other bad news, its market value has collapsed, falling from a peak of R20-billion in 2016 to just R3-billion at present.

Its 92% share price plunge from R174.83 to R14.61 has been as spectacular as Steinhoff’s. Amid all of this, founder Asher Bohbot, who spearheaded the company’s growth, resigned.

EOH offers services throughout the continent but the one project that caught the imagination of the market was aimed at youth unemployment. Begun in 2012, it provided young people with internships and learnerships at EOH, and about 83% of its “graduates” were given full-time jobs with EOH or its partners. It also supports nonprofit maths centres in the provinces to help teachers, pupils and parents with numeracy.

Its growth was fuelled by acquisitions, according Adviceworx’s Rudi van der Merwe.

“For many years it produced attractive earnings growth and its share price did tremendously well. It’s a model seen around the world where a company buys other companies using its own highly rated shares but they often run into trouble eventually,” he said.

Growth could mean that the business became complicated and complex, and difficult to control and integrate.

“When you are small, you can buy another small company and double yourself but, when you are big, it becomes more difficult to find companies which give the growth indicated to the market,” Van der Merwe said. “You start buying businesses which are not part of your competency nor which you understand.”

EOH also found itself entangled in several allegations of government tender corruption. In 2012, investigative journalism unit amaBhu­ngane reported that businessperson Lunga Ncwana, a confidant of the then social development minister, Bathabile Dlamini, was being “buttered up” by EOH directors, father and son Danny and Jehan Mackay, in a bid to win government tenders.

In 2016, the Financial Mail reported that “EOH appears to have provided a legal opinion to the department of water and sanitation as to why SAP, a rival bidder, should not be allowed to tender for the bid.” It was highly unusual, the FM said.

In January this year, Eskom informed bondholders that members of its procurement team, including team head Jay Pillay, had been involved in misconduct involving EOH, Business Day reported.

EOH has also been associated with controversial businessperson Kate Keating. The Daily Maverick reported that Parliament’s standing committee on public accounts was told that Keating, the South African Police Service and the State Information Technology Agency (Sita) had colluded to “reprioritise” millions to favour his company, Forensic Data Analysts (FDA).

The Financial Mail reported in April last year that the FDA “became the sole supplier of critical systems to the police and Sita”. It was bought by EOH in December 2015 but EOH cancelled the transaction in 2017 when targets were missed.

The EOH share price began to fall after 2016 but the recent news that Microsoft had terminated its contract with EOH was the last straw for investors. According to TechCentral, this followed a tip-off to the United States Securities and Exchange Commission about alleged wrongdoing regarding a software procurement deal between EOH and the South African National Defence Force.

EOH, in a cautionary announcement to shareholders, advised that the Microsoft investigation forms part of EOH’s larger internally initiated investigation, with the support of law firm ENSafrica, into all public-sector contracts over the past five years.

“Microsoft would not just cancel for the sake of it. They must have got evidence somehow or they must have viewed the allegations very seriously,” said FNB wealth and investment analyst Wayne McCurrie. “For many years, there have been corruption scandals at EOH but nothing has been substantiated. The recent split with Microsoft [gives] more credibility to corruption charges that have been around for a while.”

Stephen van Coller, the EOH chief executive since September, aims to return the company to its former glory. He launched Expose-It in February, an app that enables anyone with sensitive information about the company to pass it on to relevant authorities without fear of being identified.

Van Coller said he was personally dealing with Microsoft.

“Together with Microsoft, EOH is working to better understand its concerns and rationale for their action.”

Bloomberg reported that Van Coller sent an email to employees, saying that “we have either suspended or received resignations from involved employees, resulting in none of the employees currently implicated remaining in the business”.

Tshegofatso Mathe is an Adamela Trust business journalist at the Mail & Guardian