EOH woes deepen as Microsoft cuts ties

Corruption allegations swirl around IT services company, hitting share price

31 March 2019 - 07:54 By MUDIWA GAVAZA
Better protection: The Microsoft logo on the LinkedIn building in Los Angeles. LinkedIn was hacked in 2012 and now technology websites report that the details of 117-million users are up for sale. Picture: REUTERS
Better protection: The Microsoft logo on the LinkedIn building in Los Angeles. LinkedIn was hacked in 2012 and now technology websites report that the details of 117-million users are up for sale. Picture: REUTERS

Shares in SA's largest IT services provider, EOH, continued their plunge on Friday, ending the week 23.4% down after Microsoft cut ties with the company.

The US software giant ended EOH's "channel partner agreement" status as a result of allegations of corruption regarding the awarding of a software supply contract by the department of defence to subsidiary EOH Mthombo.

With investigations still under way, EOH told shareholders this week it was no longer a reseller of Microsoft software licences.

"Microsoft has further advised they are unable to enter into any discussions regarding a possible reinstatement of the partnership until they have concluded their investigations," an EOH spokesperson told Business Times on Friday.

Investors are now concerned about EOH's relationships with other major software companies such as Adobe and SAP.

'Support from stakeholders'

"We have been in close contact with all partners to discuss this matter," the EOH spokesperson said. The company was pleased with the support and encouragement it had received from stakeholders.

"In terms of our relationships with other software developers and vendors, EOH is committed to maintaining these and is regularly engaging its partners and vendors."

The company maintains that the impact on profit is not material and it is working to ensure there are limited outages or disruptions to any client services as a result of the terminations.

"All affected EOH clients should have been contacted in this regard, and we have made a sincere apology to clients for any uncertainty and inconvenience Microsoft's decisions have caused," the company said.

EOH, which has debts of R4bn, according to its latest financial statements, now has a market capitalisation of less than half that.

Ruhan du Plessis, an analyst at Avior Capital Markets, said the concerns surrounding EOH are more about reputational damage than debt servicing, as this could impact its ability to generate revenue in future.

Van Coller's tough task

CEO Stephen van Coller, a former executive at Absa and MTN, was brought in last year to restructure the business and rehabilitate EOH's image and reputation.

Du Plessis said the damage at the beleaguered IT provider will take two to three years to resolve. He added that the company's focus needs to be on retaining existing clients and staff.

Where clients are concerned, the real competitive advantage for EOH is its end-to-end service - the company implements IT solutions and trains people how to use and maintain the systems. This means EOH becomes deeply integrated with its clients' operations. A company would likely need a number of service providers to do the work done by EOH, said Du Plessis.

Staff morale fears

With the share price closing 9.25% lower at R10.40 on Friday, it is now down 94% from its high of R167 in 2016. EOH staff and management who hold the company's stock are likely demotivated and Du Plessis predicts EOH may have to embark on an incentive scheme to retain staff.

EOH has significant exposure to the public sector, which accounts for about 18% of its business, but this has been a bottleneck for the group with delayed projects, questionable tender processes, internal reviews and constantly changing officials in government departments. This ultimately affects EOH's working capital and ability to meet short-term obligations, Du Plessis said. He said it would be in the company's interest to reduce its government contracts.

EOH's direct competitors, BCX and Altron, could benefit from the company's plight.

Van Coller is in the process of trying to consolidate the more than 200 companies under the EOH umbrella.

Due diligence issues

An inability to perform due diligence on some of the acquisitions it made may be one reason EOH finds itself in trouble now, Du Plessis said. "It's not only EOH's fault."

He said there seems to have been insufficient research into the potential for corruption, for which the government and Microsoft should also accept blame.

Microsoft is being investigated for similar transgressions in Hungary.

For EOH to fully rehabilitate its image in the market will take time, Du Plessis said.

The EOH spokesperson said: "We are conducting thorough, ongoing internal investigations and co-operating with relevant authorities as we uncover and address any unethical activities. EOH is firmly committed to building a sustainable business that is untainted by unethical practices."