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Poisson d’avril

1 Apr 2021 By Christopher Thompson

It’s customary on April 1 for companies to engage in amusingly “shocking” news. Atos shareholders are unlikely to see the funny side of an announcement about potential accounting irregularities in two U.S. divisions. Worries about wider problems in the Gallic IT provider’s most lucrative market threaten to defer smiles for Chief Executive Elie Girard indefinitely.

The Paris-listed company said on Thursday an audit had uncovered several accounting errors in two U.S. entities “relating to internal control weaknesses over financial reporting process and revenue recognition” during 2020. That was enough to send shares down a distinctly unamusing 14%.

Shedding roughly 1 billion euros in market capitalisation – a seventh of Atos’ equity value on Wednesday evening – looks harsh given the entities involved only accounted for 11% of group sales and 9% of operating profit. Assuming the latter proportion is written down completely, that implies an operating profit hit of around 90 million euros.

Investors may instead be hearing uncomfortable echoes of Hewlett-Packard’s disastrous $11 billion acquisition of UK software firm Autonomous, which was accused of inflating revenue. Nothing of that sort is being alleged at Atos. But Girard’s assurance that “as of today” none of the misstatements are financially “material” may fall on deaf ears given concerns about knock-on effects in the group’s most important region: North America accounted for two-fifths of operating profit last year. Atos is also still digesting its $3.4 billion purchase of U.S. rival Syntel in 2018.

An accounting scandal would deliver another blow to Girard’s M&A ambitions, part of his strategy to beef up in hot areas like cloud computing. In February, he walked away from talks with New York-listed DXC Technology. With hindsight, that may be a blessing in disguise if he’s about to be immersed in financial firefighting.

After Thursday’s swoon, Atos shares trade at just over 4 times estimated 2021 EBITDA, including debt. That’s well below European rivals Capgemini and SAP who trade on 11 and 15 times respectively. Girard may hope for a happier conclusion to the accounting probe. Until then, Atos’ hefty discount to its rivals will persist, as will Girard’s sad face.

 

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