EDITORIAL: Pointed lessons from EOH’s fall
The implosion of what, until recently, was described as the most successful technology business in Africa, has left a crater in the corporate landscape
Anyone who thinks South Africans are lacking in innovation or creativity need only look at the fantastically inventive modes of corruption that have shot the country onto front pages across the globe in recent years.
We have tender-rigging (Eskom); hiring of shady consultants at inflated amounts (Transnet and Sars); world-class accounting fraud (Steinhoff), and let’s-steal-the-bank looting (VBS).
Last week, we had another Olympic-standard cautionary tale, this time from technology company EOH.
For 20 years, EOH was the gold standard in building companies. From its listing in 1998 at R2.80, its share price grew 6,200% to R178 as it bought everything in sight. Then, in 2016, awkward questions began surfacing about some of EOH’s more odious partners, amid dark tales of kickbacks and corruption. Only, EOH would hear none of it. And for months it has been saying its corruption problem has been solved.
For example, after revelations of shady deals relating to the social grants tender (and involving two directors) surfaced in 2016, former CEO Zunaid Mayet wrote to staff saying that after a legal review, he was "satisfied that the insinuations in these reports are false and untrue".
A few months later, when it turned out that companies EOH bought from businessman Keith Keating may have been rotten, Mayet defended EOH’s "rigorous due diligence" and said it had "zero tolerance" for devious behaviour.
Amid new revelations in mid-2018, Mayet said law firm ENSafrica had scrutinised all EOH’s contracts and found nothing wrong. "If anything, they found a little bit of ill-discipline from internal process, such as not ensuring signatures were done on time. Thankfully they did not find anything that raises red flags."
Three weeks ago, no less a company than Microsoft axed its contract with EOH, a contract which allowed EOH to resell Microsoft licences. A whistleblower alerted the US stocks regulator, the Securities & Exchange Commission, about suspect goings-on with a R120m SA department of defence software deal. TechCentral’s Duncan McLeod reported that EOH had received a $5m margin for "doing paperwork as a middleman" for the defence deal, which the whistleblower said was "a red flag for corruption".
It’s a recipe for how to insult your investors. It’s no wonder that in 2017 analyst Keith McLachlan said: "The market is saying it doesn’t trust that EOH has communicated the full picture."
New CEO Stephen van Coller has done more than most. In the past few weeks, there’s been a wholesale purge. Four directors, including founders Asher Bohbot and Rob Sporen, resigned.
This week, Van Coller wrote a letter to staff in which he spoke of "ensuring the integrity of the investigation process — we need to be thorough". EOH has now flagged six contracts with the government and Van Coller said: "We have either suspended or received resignations from affected employees."
The EOH story should stand as a cautionary tale for every other company in SA. As McLachlan puts it, over 15 years EOH bought a new business, on average, every two months. "Acquisitive growth may be quicker, but it’s riskier and inevitably of lower quality," he says.
As the corruption allegations began to mount, EOH failed to manage its reputation properly. And once the genie was out of the bottle, the best staff began to flee too. "EOH built a machine on positive momentum, but it never once contemplated what would happen if it all began to slow down," says McLachlan.
The implosion of what, until recently, was described as the most successful technology business in Africa, has left a crater in the corporate landscape. Many other companies that have followed the same fast-living strategy should see this as a reality check.