The rise and fall of EOH: When heavenly growth goes to hell
The angel of fast expansion and decentralisation comes with the devil of risk and broken chains of responsibility
A few years ago, I had the feeling that the business press was not covering EOH, then a fast-growing IT group, particularly well. The company grew steadily but aggressively in the 2000s and by 2014 was a regular feature in the Sunday Times company of the year awards. But the writing about the company wasn’t particularly elucidating.
There were a couple of reasons for this. Even after its fabulous growth phase, it still wasn’t a big company. Its market cap in the 2010s was around R10bn (a lot more than it is today!) rising to a peak of about R20bn – solidly in mid-market territory. This is a contract-based business, and everything depends on the nature of the clients and the character of the projects. It’s difficult to know what these are, never mind what the margins are.
In any event, I asked founder and then CEO Asher Bohbot for a meeting and he surprised me by readily agreeing. We had a light lunch in his Bedfordview headquarters, and I found him entertaining, engaged, charming with a little touch of prickliness. He had the worst comb-over I’ve seen in anyone before Donald Trump. His story is extremely unusual: a Moroccan-born Jew who stumbled into SA barely speaking English at the age of 27 to work for AECI, and built one of SA’s biggest IT companies. At AECI he became interested in business outsourcing and other businesses on the processing side of internet technology, eventually breaking away to start his own business.
My big concern at the time was EOH’s rate of growth. In 2014, EOH’s compound growth rate was in the low 60s, which is stunning. Most people in the market think fast growth is just unadulterated goodness, and the business commentary at the time reflected that awe. But to me, it’s almost always a problem, even if it’s the kind of problem you want. So we spent a lot of time talking about how you create and deal with fast growth.
As it happens he had a paper flip-chart in his office and he immediately grabbed a koki pen and showed me how he had done it. He drew these blocks on the board, with the second one adjacent to the first, and then the third adjacent to that, and so on. Soon the whole board was covered with blocks.
The idea, he said, was that every business they entered taught them something about not only that business but the businesses in its supply chain and those around it. EOH’s business model was to gradually expand outwards, adding a new block to each block in which it operated.
He made it sound easy. I remember asking about how these “blocks” operated within the whole. I can’t remember exactly what he said, but I do remember he emphasised their independence and operational freedom. I commented that this model would require a high degree of staff responsibility and authority, and he heartily agreed.
After the meeting, the whole thing made a little more sense to me. But thinking about it now with the benefit of hindsight, the risks equally make sense. The weakness of a heavily decentralised business model is that it’s hard to enforce, or even know what your staff are up to. As a business gets bigger those problems increase, even as they are masked by the rising revenue. And even in a weak economy, things were really rolling. In 2008, revenue was just under R1bn. Five years later it was R6bn. Last year, it reached R16bn.
After having a lot of luck, the company hit some bad luck. This fast growth was reflected in the share price, and, as a result, some people in the company got greedy and bought shares on spec. And the problem with that is if the share price goes the wrong way, you have to cash your shares to cover the losses, which causes the share price to go down further.
The company got some bad press, some of it fair, some of it speculative. But it was the age of the unwinding of state capture, and EOH, it turned out, was doing work for some of the most questionable businesses in SA. The company tried everything to stem the blood flow. Bohbot resigned, but then returned briefly, eventually handing over to former Absa Corporate head Stephen van Coller last year.
Van Coller has clearly been given what’s called a hospital pass in rugby, but he is doing the right thing. Microsoft renewed the bad news by cutting ties with subsidiary EOH Mthombo, which had been reported to the US Securities and Exchange Commission for an allegedly corrupt R120m software deal with the department of defence.
Just when you thought the share price couldn’t get lower, it got lower. EOH is now trading at around R15, which is 90% down from its peak in 2016.
Van Coller has engaged ENSAfrica to look at all its bids for state projects over the past five years, and PwC is checking its audits, and so on. Hard but it has to be done.
But the real lesson lies in that flip-chart with blocks on it; the angel of fast growth and decentralisation comes with the devil of risk and broken chains of responsibility.