By John Cushing, CEO of mnAI
From FTSE 100 firm NMC Health facing an investigation into correct shareholder reporting to London Stock Exchange-listed company Lekoil, for example, falling afoul of alleged fraudulent financing deals, the need to ensure information is current and accurate has never been stronger.
The time-intensive nature and often complex discovery and analysis process of M&A’s is no secret and as deals become larger in scope, private equity firms are focusing their efforts on how best to innovate to ensure their due diligence processes are refined.
The historic use of due diligence processes such as those used by Companies House are no longer enough to meet the large transaction volumes and complex business operations dictating the current environment bound by stricter regulations.
Enter Artificial Intelligence (AI). A technology that has seen uptake soar across a diverse pool of sectors and one set to radically transform business operations and consumer behaviour. AI has surpassed many other disruptive technologies in reducing costs and boosting efficiencies, making it a strong contender in providing businesses with a more competitive advantage.
One area AI has proven immense value is within due diligence services. Using a risk-focused analytic approach, AI can be applied to look at real business performance and identify any inconsistencies in real-time. Using AI, companies can be supplied with a more comprehensive understanding and accurate view of the business or sector they are investigating.
The current climate of Companies House
With data showing that nearly ten percent of all big mergers and acquisitions are not completed annually, measures are required to ensure the fallout of capital and jobs are not widespread. When a deal is cancelled, both share price and reputation is compromised, resulting in termination fee and advisory costs which impact on resources and time.
With each acquisition on the table needing analysis from every angle to locate all potential risks and retrieve all the hard facts to confirm a deal, a more thorough system is necessary to deliver the right information consistently across the deal pipeline.
As it stands, Companies House holds the records of most companies and their filings. The system is currently utilised by business leaders when searching for and considering targets for a prospective M&A in order to evaluate the risks and rewards resulting from a potential acquisition. Used alongside media databases including both national and specialist press, the information encompasses litigation databases and records on insolvency, civil debt and judgments and bankruptcy.
Looking beyond Companies House
Currently, there are 4.4 million active companies on the Companies House register. It may come as a surprise that the UK is one of the easiest countries to set up a company, only taking 24 hours and costing just £12. Companies House currently does not verify the information submitted to its platform and typically does not amend or remove data on the register.
The makeup of Companies House has subsequently led to many concerns surrounding the accuracy and security of data hosted on the register. It is at risk of false information, duplication and the misspelling of director names, and vulnerable to criminal abuse such as setting up fake ‘shell companies’ to facilitate the ‘cleaning’ of dirty money. One notable campaign was by the anti-corruption campaign group Global Witness which investigated PSCs (person of significant control – the person who owns the registered company). In 2018 they found that 4,000 PSCs listed were below the age of two, and one had not yet been born.
While the government reacted to ongoing concerns about Companies House in 2019 by opening up a consultation to improve the system and made a series of recommendations, in its current state it is still too slow to match the frequency and complexity of M&A deals in the UK market.
Companies House will still continue to play a valuable role in the registry of business information, however the powers necessary to adequately investigate current companies on the system notwithstanding ones added each day are likely to take years to implement and will require legislation to support it.
Changing the game with AI
The entire process for identifying and understanding a target company can now be transformed from months to minutes. AI can add significant value to every stage of an M&A deal, from accounts receivable to real-time data collection, the technology can provide in-depth research of business targets from start to finish.
The emergence of an AI-powered deal-flow search engine on the scene can collect huge volumes of data points on UK companies. The breadth of information on office profiles alongside SIC code searching with natural language search to provide predictive modelling for future valuations is now a live opportunity.
This level of AI technology presents an opportunity for target companies to be M&A ready upfront and significantly decrease the amount of manual research required to assess, analyse and forecast a target’s financial growth, online reputational, financial and combined credit scores, as well as their competitors.
If directors and dealmakers are to be more effectively prepared for any M&A deal in today’s climate then a new approach is needed. Less reliance on Companies House will be the next important step to reduce data discrepancies and to fully take advantage of AI-powered data platforms to process, capture and verify data with precision. The future of the UK’s deal-making process is bright but to truly ensure confidence across the market, AI must be fully embraced and integrated to reap the benefits and ensure transactions are accurate, effective and based on real-time data.