New broom wouldn’t be quick fix for G4S

July 16, 2012

By Chris Hughes

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

G4S has got one thing right in its response to the Olympics security fiasco: it has admitted that Chief Executive Nick Buckles may have to quit. That may be a necessary, but not sufficient, condition of the company’s recovery.

The UK-listed security group has committed two errors – failing to deliver on its contract to provide security services to the London Olympics, and failing to get on top of the problem sooner. The immediate cost will be a loss of 35 million to 50 million pounds, a big hit for a company that made a pre-tax profit of 279 million pounds last year. In the longer term, it will be hard for the UK government to award new business to G4S if there’s an alternative provider. That puts an estimated 10 percent of the company’s 7.5 billion pounds of revenue at risk. If the reputational fallout extends to private customers, the damage will be worse.

The market reaction – to wipe about 12 percent off the company’s value over the last week – looks about right. Though this isn’t a “Gulf of Mexico” moment, a chunk of value has clearly been destroyed.

However, it would be a mistake to dismiss the Olympics fiasco as a one-off. Though details are still unclear, the likely explanation is that G4S was greedy and over-ambitious, and its client was naive and disorganised – problems that became disastrous due to inadequate systems for escalating information up to the board. That raises profound questions about G4S’s operating model. Fortunately, the company’s new chairman is well-placed to lead an investigation and make any necessary changes.

Buckles was already on probation after the company’s failed bid for Danish rival ISS earlier this year. It’s hard to see how he can lead the company out of its latest mess. However, a successor won’t be easy to find. The leading internal candidate ran the UK business.

Most other companies would be takeover targets in this situation. But G4S looks too big for trade buyers, a breakup would be risky and a private equity buyout wouldn’t restore its credibility. Shareholders will just have to sit this one out.

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