Getting Smarter About Corporate Intelligence
The truth (and some myths) about gathering, analyzing and acting on information in the global marketplace.
In the public imagination, corporate intelligence gathering occupies a shadowy realm where business detectives use any method they can to dig up critical information. These methods, people believe, include honey traps, wiretapping phones and hacking into computer networks — whatever it takes to ferret out the secrets the detective’s client can use to gain a competitive advantage.
The fact that these activities and others like them are illegal and unethical and come with insupportable risks often gets lost or is glossed over in the glamour of the news.
In recent years, there has been a surfeit of stories about data nefariously acquired, most famously Edward Snowden, the U.S. National Security Agency ("NSA") contractor who gained access to and disseminated classified NSA information. Employees at Britain’s News of the World newspaper admitted hacking into the phone messages of celebrities, political figures and crime victims in search of scoops. Popular TV shows such as "Homeland", "Criminal Minds" and "Spooks" (in the UK), as well as movies such as "Mission: Impossible" have contributed to this inaccurate image of corporate intelligence by glamorizing hacking and other forms of illegal corporate espionage, making it seem easy and essential to busting bad guys or gaining an edge.
In fact, corporate intelligence gathering has nothing to do with the worlds of Jason Bourne or James Bond. Companies need information that’s not readily available to them — about markets, customers, partners and competitors — but in real life, that does not involve obtaining facts through cloak- and-dagger means.
And while companies seeking data to plan their next move frequently are under intense financial or competitive pressure, gathering reliable, actionable intelligence — and understanding it — takes far longer than a Google search, a phone call or an hour-long television drama. The gathering of corporate intelligence requires a time-consuming and delicate balance between collection and confidentiality.
Savvy consumers of corporate intelligence (particularly in the financial services sector) also recognize that information gathering today is conducted in an increasingly difficult regulatory environment and is subject to intense scrutiny by both regulators and lawmakers charged with ensuring that such activities don’t enable clients to get and profit from insider information or their competition’s intellectual property. For example, MGA Entertainment in 2011 successfully sued rival toy company Mattel, alleging that it had infiltrated confidential show rooms. A California jury found that Mattel misappropriated 26 categories of trade secrets, and the company was fined $309 million.
Good intelligence can make a vital difference to increasing market share and boosting profits. It can help companies avoid trouble. Pursuing corporate intelligence in the wrong way, however, can cause companies significant embarrassment, fines and reputational damage. It is important for companies to understand both the value of information and the realities of acquiring it.
Who Needs Corporate Intelligence and Why?
Companies in search of corporate intelligence encompass a variety of entities, including hedge funds, investment banks, private equity firms, multinationals and law firms (acting on behalf of their own clients). What all these organizations have in common is a plan to grow, whether by entering new markets, identifying acquisition candidates or bringing innovative products to market by bolstering research and development efforts.
Firms contemplating entering emerging markets soon discover that local governments often prefer companies to include local ownership. That stipulation can be met through various approaches, from licensing agreements to joint ventures to strategic alliances, and each method carries a different level of risk and varying amounts of return. To find reliable local partners, organizations need to conduct pre-transactional due diligence on each serious prospect. As with any business deal, a new partner inevitably exposes a company to a roster of risks. In many foreign jurisdictions, that includes the risk of bribery and corruption. Given the resurgence in the enforcement of anti-corruption laws — especially the Foreign Corrupt Practices Act in the United States and the UK Bribery Act — companies need to make certain they are hiring the right managers for their operations and that employees remain hyper-alert to any sign of internal or external fraud or corruption.
Organizations need geopolitical and competitive assessments of countries whose markets they are planning to enter. Political, legislative or regulatory changes in those countries — anything that can affect the business environment — need to be analyzed and monitored.
Increased worldwide merger and acquisition activity, which now is at a seven-year high and had a combined value in excess of $1.8 trillion in the first half of 2014, also has whetted the appetite for corporate intelligence. For dealmakers, gathering and analyzing as much information as they can are essential to making a prudent acquisition. By going beyond public statements, intelligence gatherers can piece together an insightful portrait of what the key players, as well as shareholders, really think. In cases where there are activist investors, quality business intelligence can help acquiring companies anticipate if such shareholders will try to scotch a deal or will push for a higher offer price. Whether investigating bidders or bid targets, the goal is to obtain intelligence that will help ease the transaction challenges that can sabotage a corporate coupling.
Companies entering foreign markets inevitably assume unfamiliar political risks. Assessing such risks in a timely manner involves engaging intelligence- gathering sources that can collect and funnel useful information into the company’s decision-making pipeline. Political discontent, fueled by social media, can sprout quickly, suddenly transforming and impairing business conditions.
Even organizations with global experience have been taken by surprise in recent years. In 2014, simmering anti-Chinese sentiments in Vietnam produced riots when China sent an oil rig to a contested area of the South China Sea. A few months later, pro- democracy protests in Hong Kong escalated after the Standing Committee of the National People’s Congress of the People’s Republic of China announced its decision on proposed reforms to the Hong Kong electoral system. And those events occurred in jurisdictions generally thought to be relatively stable. In Indonesia and Myanmar, both representing a target for foreign direct investment and each one struggling with political reform, careful and continuous risk monitoring is essential.
A smart intelligence-gathering program is not a guarantee against disruptive surprises, internal or external. But good intelligence enables companies to identify competitive gaps and find the best route for staying ahead of rivals. Intelligence also allows a company see beyond itself to examine its own analyses and preconceptions, whether in the context of market conditions or government regulations.
How Corporate Intelligence Really Works
Corporate intelligence is based on the critical analysis and evaluation of collated information from a range of sources. These include hard-to-obtain public records and online information in multiple languages. Information also comes from paid-for specialized database services and discreet interviews with reliable sources — sources who do not include current employees of the target company nor any person who has signed a confidentiality agreement. Reputable corporate intelligence gatherers do not engage in industrial espionage; they do not hack; they do not misrepresent themselves.
However, while there may be limits on how corporate intelligence experts can conduct investigations, there’s no limit to how valuable the findings may be.
Techniques that produced results
A bank in India was suspicious about a medical equipment company to which it had made a loan. The borrower, the bank suspected, was manipulating earnings and inflating accounts receivable. Engaging FTI Consulting’s Global Risk & Investigations practice (GRIP), the bank wanted to ascertain the authenticity of the medical equipment company’s numbers and to confirm the relationship between the company and its distributors/auditors.
The investigation unearthed many irregularities regarding the medical equipment firm. It was making dummy consignments to overseas distributors; it was labeling goods made in India as American, exporting and re-importing them in violation of the Foreign Exchange Management Act.
Through a careful review of public documents, GRIP discovered that five of the company’s top seven distributors were based in Singapore — and thus were barred from conducting business there. Site visits revealed that those five distributors, in fact, were not operating out of the address each listed. Furthermore, six of the seven distributors were either owned or managed by associates of the company’s promoter, while a politician held interests in the company and in its auditor — both clear conflicts of interest.
Apprised of these findings, the bank was able to negotiate favorable loan repayment terms with the medical equipment firm. If the bank had filed a complaint with regulators, the medical equipment firm would not have been able to fund either its near-term or long- term operations.
In another case, an international bank had extended a multimillion dollar loan to an iron ore mining company for use in a steel plant project in Africa. The mining company claimed to have made advance payments to manufacturers and suppliers of mining equipment in India. But the borrower had stopped servicing the loan. The bank wanted investigators to find out where the equipment was and to clarify ownership status.
Again, through publically available documents and discreet inquiries,FTI found that none of the suppliers in fact had received any advance payments and that the advance-payment documents appeared to have been forged. Further, FTI found that one supplier was a dummy entity and that there was no equipment. The bank then asked FTI to go further and look into the background and reputation of the company and its main principals. The bank also wanted to know where its money had gone.
As it turned out, the mining company’s engineering, procurement and construction contractor was in the process of ceasing operations. There was a clear indication that the loan for the purchase of equipment for the steel plant project had been diverted to the company’s cash-strapped mines. And two key principals of the mining company had a history of misusing funds to finance an extravagant lifestyle.
Based on these findings, the bank decided it would engage legal resources to recover its loan.
Often, especially in emerging markets, public records are not enough. A Japanese company seeking to diversify into biofuel production had identified a potential joint venture partner. The company wanted FTI to investigate the firm.
During the investigation, FTI learned from local sources that money supplied by the partner to a plantation manager to fund the planting of palm trees (an agreed- upon concession for gaining permission to build the biofuel plant) may have been misappropriated. Judicious inquiries suggested this was a possibility given the plantation manager’s recent decision to build an elaborate house and purchase a luxury car.
Through aerial photography, FTI found that palm trees had been planted only around the site’s perimeter; the center was empty, like a doughnut. In fact, just 30 percent of the trees paid for actually had been planted, and, once informed, the Japanese company decided to end the relationship with its partner, withholding a planned investment of $25 million.
Making an Informed Decision about Corporate Intelligence
If the quiet end of a partnership wouldn’t make for a good climax in a television show or Hollywood movie, the ability to make informed decisions makes for pretty good business. And contrary to popular perception, corporate intelligence professionals aren’t necessarily “deal-slayers.” In FTI Consulting’s experience in Asia, investigations result in deal deaths less than 5 percent of the time.
Corporate intelligence is about the systematic gathering, analyzing and interpretation of data in support of a business’ strategic plans. It is about reading documents, tracking market trends and legislation, making discreet inquires, using search engines and online archives, and speaking with suppliers, competitors and customers. It is not about skullduggery. It is about improving the quality (and outcomes) of a company’s business decisions.