Microsoft contract drama hurts EOH stock

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EOH Group CEO Stephen van Coller.
EOH Group CEO Stephen van Coller.

EOH's share price fell 10.41% yesterday as the drama between itself and Microsoft continued.

The IT services company last week confirmed that Microsoft had given notice of its intention to terminate its channel partner agreement with EOH Mthombo, one of its subsidiaries, with 30 days' notice. It said the termination could potentially result in profit impact of approximately R10 million in the current financial year.

In a SENS statement yesterday, EOH reiterated that "Microsoft has still not officially provided us any confirmation for the reasons for the notice".

CEO Stephen van Coller said: "I again encourage anyone who has evidence to please come forward so we can root out any historical, unethical business practices both within EOH and the broader country."

Yesterday's statement was after "further developments in the media". TechCentral reported that Microsoft terminated the contract after an anonymous whistle-blower filed a complaint with the United States Securities and Exchange Commission (SEC) about alleged malfeasance to do with a R120 million contract with the SA department of defence.

The market did not take kindly to the news and at one point yesterday, EOH shares on the Johannesburg Stock Exchange fell 22%, but rebounded to close 10.41% lower for the day. At the close of trade on 11 February, the group's stock was trading at R26.71 per share, but since the news of the Microsoft split broke on 12 February, the stock has fallen by 34.6% to yesterday's close of R17.47 per share.

Over the past year, the company's stock has plummeted 71.9% and its market cap is now sitting at around R3 billion.

EOH said in yesterday's SENS statement that the Microsoft matter "is now sub judice" which implies that the courts have become involved and the matter is being considered by a judge or court and public comment that could prejudice the case is prohibited. However it is unclear whether court proceedings are in fact under way in this situation and a Microsoft spokesperson told ITWeb that it was "not aware of any court case".

Internal investigation

On 15 February, the group also issued a SENS statement saying it had initiated an internal investigation, supported by law firm ENSafrica, into EOH Mthombo's Channel Partner business unit. ENS is part of "a broadened review of large public sector licencing agreements".

EOH said the appointment of ENSafrica was to perform an independent, ongoing risk-based, monitoring and oversight role in all the group's major public sector bids, contracts and engagements.

"They've also overseen EOH's review of all material current public sector contracts to ensure governance relating to these contracts were adhered to.

"Following a recent fruitful meeting between the EOH and Microsoft leadership, Microsoft has advised that it is taking the EOH proposals under consideration and further review.

"ENS continues to give us regular updates and we are committed to swift and appropriate action. As part of our current processes, ENS reviews about 8-10 bids per week. Shareholders will be advised of any further developments," the group elaborated yesterday.

EOH says it has been a Microsoft partner for the past 20 years and is the largest partner by skills.

"Ending our partnership with EOH was a difficult decision that we did not take lightly. Although we do not comment on the specifics of our partner relationships, we felt it necessary to make the tough decision to end our partnership even after weighing the possible impact," a Microsoft spokesperson told ITWeb.

The EOH Group comprises 270 legal entities, employing approximately 12 500 people, of which 11 500 are in South Africa and over 1 000 internationally in majority-held subsidiaries.

On 15 February, EOH also commented on the past two years and the numerous negative allegations that have been levelled against it.

"All these historical allegations have been proven unfounded through diligent efforts from EOH, disproving or securing the withdrawal of the stories. Notwithstanding this, the EOH reputation was tarnished, causing significant harm to our people, shareholders, customers and partners over a protracted period; masking the true value of the EOH business. As a result of the last two weeks' allegations, the board and management are widening efforts to obtain clarity and deal with any issues in the interests of all stakeholders."

In January, EOH rubbished misconduct allegations levelled against it by Eskom. EOH said a SENS statement from Eskom "mentioned EOH because of an unsubstantiated news story" and that Eskom subsequently published another SENS stating the matter pertaining to EOH was closed, confirming no wrongdoing on the part of EOH.

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