RENTOKIL - A TALE OF OUR TIMES.

Many readers will remember the halcyon days of Rentokil Initial, when the company was the darling of institutional investors and many in the financial press, when its CEO from 1983 to 2004, Sir Clive Thompson was feted by all as 'Mr Twenty- percent' in recognition of the company's apparently unstoppable year on year profit growth. Sir Clive's cup overflowed as Rentokil's acquisition of BET was hailed as a stroke of genius and he was appointed President of the Confederation of British Industry. Naturally, a knighthood did not take long to follow.

And yet the signs of problems to come were apparent even as the company seemed to be charging ever upwards fuelled by the high octane of superior....... what??
Anybody with serious experience of the insides of business enterprises would have questioned whether any company could sustain such levels of profit growth without sacrificing the future by under-investing and exploiting employees.
A senior businessman who had a close involvement with Rentokil described it as 'a truly nasty company to work for' as far back as 1992. He went on to describe Sir Clive's dominance of the board and the fact that any discussion on strategy was precluded, as the only thing deemed to matter was how to continue year on year profit growth.
An analysis of pay levels in the company back in the mid 1990's would have revealed massive disparities between those of top management and the average employee - raising suspicions the apparently fantastic performance of the company might have been sustained by exploitation of the low paid.
Signs of unusually high performance, allied to exploitation of people and driving staff progressively harder to meet ever more challenging goals usually signal one thing - a crash of major proportions is looming. It may not happen in one year or in three, because top line profits can be apparently maintained by devices such as under-investment, acquisition accounting, extracting 'synergies' from acquired companies (asset stripping) and driving staff ever harder to produce short-term results. But it is almost a law of nature that a company that is driven too hard, like a human being or animal, will eventually collapse, often catastrophically.
Cynics have a simpler way of predicting trouble ahead - beware any company which exhibits unusually high performance whilst its CEO takes on a major external involvement, receives a knighthood and makes a large acquisition!

Those who believe that the above is the product of a hopeless jeremiah should read the statements made by Mr Doug Flynn, recently appointed CEO, following the departure of Sir Clive Thompson and his CEO appointee, James Wilde.
The Guardian of August 26^th 2005 reports in its business section:

Reporting a 40% slump in pre-tax profits to £93.2m for the first half of the year, the Rentokil boss said that the firm's performance had been in decline since 1998, when the '20% era' of continual earnings growth ended.
Sir Clive was shown the door as chairman in May last year.
James Wilde, his relatively new appointment as chief executive, followed last summer.
Mr Flynn, who joined from Aegis this spring, has been assessing the state of the business:
"Our review has shown how the pressures - both internal and external - to meet (City) expectations led to management prioritisation of very short-term goals", he said.
The new bosses, including chairman Brian McGowan, added: "Prices were pushed to unsustainable levels. Costs were relentlessly taken out - often to the detriment of growing the business. Service quality was sacrificed. Sales efforts were impeded. As budgets became ever more unrealistic, so morale dropped and the focus became ever more short term"

Rentokil had concentrated on acquisitions such as BET and there had been no prioritisation of investment in the past.
"Since that acquisition there has been little clarity about where the best value creation opportunities are...BET and Rentokil were never fully integrated and there are still overlapping businesses in certain geographies", they said.
Undue cost cutting and a poorly focused sales strategy had also hurt the business.
"Since service quality is the single most important matter for our customers, declining service has resulted in a high level of terminations", the management statement added.
Rentokil had also suffered in being deficient in customer data analysis, partly due to insufficient IT spending, while its organisation and structure were ineffective.
"It has been based on a 'command-and-control' approach and has impeded rather than ensured good decision-making. It has encouraged a silo mentality and has resulted in the organisation becoming overly centralised and inward looking", said the statement.

This is a very credible analysis of what happens when a company is driven from the top to meet totally unrealistic investor expectations. It is a bind that is all too easy to enter into - investors accept performance 'promises' made by ambitious top managers, managers move heaven and earth to meet these expectations and the two enter into a sort of collusive gavotte. In the frenzy of the dance, common sense flies out of the window, individuals are lionised and the company is flogged and driven harder and harder to meet the demands of fickle investors and press. Sir Clive apparently knows how fickle as he has been reported to have reflected on the 'hero-to-zero' syndrome to a business school audience.

The good news is that the current management have fingered the roots of the problems. Hopefully they have the skills to start a healing process and nurse the company back to a state of robust health. They have already spelled out the agenda, which is simply to reverse the negatives that they have already reported. The most difficult wounds to heal are likely to be within the organisation, as introducing a quite different culture is likely to entail a great deal of change and development of people. The other key focus will have to be the company/customer interfaces and the quality of the service offering.
The big question is whether investors will give Rentokil sufficient time - at the least, this is a 5-year rebuilding job.
Those who do not believe this should read Lou Gerstner's excellent book about the re-building of IBM, Who Says Elephants Can't Dance?
The Redland case, also in this section, is another example of weakening a company by neglecting the operational basics of running a business.
The terrible truth is that there are many ways to ruin companies -flogging them to death - trying to drive through unrealistic or unsustainable strategies from the top (Marconi, Enron) - transaction-based strategies led by unwise M&A deals (Tyco, Worldcom, Marconi, Redland), being the most common. It is a terrible paradox that the many companies destroyed in this way have enjoyed enthusiastic investor and press support for a time. This includes major disasters like Enron and Marconi. And of course, Hanson trust, Britain's leading asset stripper, was followed by a crowd of swooning City admirers until the acquisition frenzy hit the ICI wall.
The boring reality is that there is only one way to build a good company - to create a sound operating infrastructure, excellent at performing the basics that will bring success in a particular industry - to invest in keeping it fresh and adaptable - and then to keep on doing it relentlessly - but this is usually labelled as boring by the short-term sensation-seekers of press and City.

The danger is that, having applauded the flogging of the Rentokil horse to near death, they will simply demand that the exhausted and undernourished beast be consigned to the knackers yard and dismembered.
Rentokil is a valuable British company with sufficient of an international customer franchise left to make it worth saving. If the world will lay off the company and let the management begin the process of rebuilding and healing, considerable long-term value can be created - the only question investors should be considering is whether the current management have the skills and stamina to re-create a healthy organisation and culture.