MICROSOFT RESALE DEAL
EOH plunges as defence contract adds to its woes
The rough ride for EOH investors resumed on Monday as its shares plunged to their lowest level in eight years after a report that Microsoft’s decision to cut ties with the technology company was linked to a tip-off about a contract with SA’s defence department.
EOH, whose market value has shrunk 88% since December 2016, partly on governance concerns, said last week the global computer giant was ending its resale partnership with the company for reasons that were not yet clear.
The JSE-listed technology company’s share price slumped more than a quarter through the week, even though Microsoft’s move is only expected to dent profits by about R10m in the current financial year, equivalent to 3.5% of EOH’s profit from continuing operations in 2018.
But the rout continued on Monday after TechCentral reported that Microsoft’s decision was related to an anonymous complaint to the US Securities and Exchange Commission about a R120m software deal between EOH and SA’s department of defence.
EOH’s shares plunged 22% in early trade on Monday, to their worst level in eight years, before closing 10.4% down at R17.47, giving the company a market capitalisation of R3.1bn.
The group was worth R25.2bn in late 2016 after growing through a series of acquisitions, but has been plagued by reputational concerns related to government contracts. In January, Eskom dealt another blow to EOH’s share price when it said its former chief procurement officer had been "involved in acts of misconduct involving EOH".
The technology firm said at the time it had already been cleared of any wrongdoing.
Its new CEO, Stephen van Coller, said in December EOH would no longer take on large public-sector projects. He has also hired law firm ENSafrica (ENS) to review all of the company’s large historical licensing contracts with the state.
Reacting to the TechCentral report, EOH said on Monday
that Microsoft "has still not officially provided us any confirmation for the reasons for the notice" and that the matter was now sub judice.
Van Coller told Business Day that ENS had been reviewing up to 10 government bids a week, and those included the department of defence contract. He said EOH was putting new governance processes in place, to be vetted by PwC, and urged "anyone who has evidence" to assist the company in rooting out unethical business practices.
"If people don’t come forward, it’s very difficult to sift through 273 legal entities and 11,500 employees. But the point is, if you start putting the right systems in place, you limit it or you can catch it."
Avior technology analyst Ruhan du Plessis said management must have been aware of the reasons behind Microsoft’s decision, particularly since the companies had already met.
"Investors are fearing the worst and if the claims of the whistle-blower are indeed correct, then the chances of similar instances having occurred is high given EOH’s exposure to government contracts and a lack of governance."
Nick Kunze, portfolio manager at Sanlam Private Wealth, said the market was being "brutal" towards companies that had entered into questionable government contracts. "We don’t have any exposure to EOH, we don’t look at it, but until there’s more clarity out of the company, I would certainly stay away."