EOH: it’s too soon to panic
Bear in mind the remedial action being taken, writes Nigel Dunn
OH started out in 1998 with 20 staff members and one client. Two decades later it had 270 legal entities — most run by entrepreneurs whose businesses had been acquired by EOH — and with a staff complement of about 11,500 people.
To describe growth like that as anything less than explosive would be an understatement. Governance issues aside, the warning signs were already there.
Return on invested capital peaked in 2009 at 51% and by July 2018 it was down to 3%. Return on assets managed showed a similar trend, peaking at 20% in 2006 and dwindling to less than 2% in 2018.
Goodwill was R75m in
2005, but had bloated to
R4.2bn in 2018. In short, balance-sheet growth had run well ahead of that of revenue and earnings — indicating that EOH had either overpaid for some acquisitions or had not extracted the cost savings and synergies anticipated at the time the deals were consummated.
Unfortunately, this rapid growth was not matched by adequate processes, procedures and governance measures being put in place. Second, it coincided with the rise of the “tenderpreneur” and moral degradation of parts of the SA public and private sector. The resulting “perfect storm” resulted in an implosion in the share price. It went as
Elow as R10 in April, when the market briefly lost its senses after a slight delay in the release of results.
The key, question is: where to now?
Current CEO Stephen van Coller was approached by founder Asher Bobot last year, when Bobot realised the group had become too big to be run as a conglomerate. EOH needed to be professionalised, streamlined and the corporate layer of management strengthened along with governance procedures.
Half the battle had been
won as Bobot knew what the problems were and took steps to address them. In Van Coller he appointed a person with the perfect skills-set. He is a banker, and governance is something banks and bankers take seriously.
Also, nearly half of his 20year banking career was spent in investment banking, which means reconfiguring companies comes naturally.
Lastly, Van Coller has a reputation for making the tough calls and getting things right.
EOH has refined its operating structure into three distinct business units — EOH ICT, Nextec and Own IP. It is intended that each will have its own independent board and each business is to be accountable for its own governance, risk and compliance, to be overseen by its respective boards.
There are also cost-saving initiatives under way, an effort to optimise the property portfolio, as well as the establishment of a central treasury and centralising procurement of large capital items. The aim is for savings of R100m by August 2020 from optimisation of the property portfolio alone.
The bigger picture is that EOH is morphing into a holding company with its own independent board. Several directors have resigned to comply with King 4 stipulation on board-member independence. New appointments are expected shortly.
Management has also been strengthened at group level to ensure a greater level of oversight than prevailed in the past. Recent appointments include a chief financial officer, an exec