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USING ANALYTICS TO CHEAT TO SECURE THE ONE RESOURCE THAT MONEY CAN’T BUY

By Avtar Dhillon, Director, Business Value Consulting, ThoughtSpot

 

“It’s not that we have little time, but more that we waste a good deal of it” – Seneca.

Time is precious. Time lost cannot be regained. There are a lot of sayings about the fleeting nature of time. Right now, time is flying. In a volatile market where enterprises might need billions in revenue just to stand still there is a pressing need to understand how to compete and build back better as we go into 2021. Take the mortgage market. Lenders lost billions of pounds when lockdown stopped the housing market.

A report conducted by the Economist Intelligence Unit found this year that while AI adoption is widely in use by most financial institutions, 86% of banks and insurance companies plan to increase AI-related investment into technology by 2025. The research was drawn from retail and investment banks and insurance companies across Europe, APAC, and the US.

One of the main reasons for this adoption comes down to time. Analytics and AI can support smarter financial industry planning, and shave time off every activity in order to beat competition and extract maximum value from the market where possible. It’s an important consideration as many financial services firms find themselves in an uncertain position post-Brexit and during the global pandemic. The future is uncertain, markets are volatile, and businesses, consumers, and the government have all been adjusting to changing circumstances. AI is held by financial sector firms as the technology with the potential to help them maintain competitiveness in this uncertainty.

The Economist study found that while there is a strong degree of confidence in the benefits of AI, the reality is that the technology is not yet largely in use: More than half of respondents say AI is not incorporated into their processes and offerings, with only 15% saying the technology is used extensively across the organisation. However, the benefits that have already emerged combined with respondents’ plans to double down on AI investment in the short-term show this technology is slated to drive a massive wave of future growth for financial services.

Avtar Dhillon

Banks and insurance companies perceive AI as critical to unlocking new growth opportunities and reducing costs. Respondents were clear AI will transform businesses in a number of ways over the next five years, including spurring new products and services (27%), opening new markets (25%), and paving the way for innovation (25%). About one-third (29%) expect between 51% and 75% of their workloads to be supported by AI technologies in five years.

In addition to driving growth, AI promises significant savings today and in the future: 37% reported that their organisation has reduced operational costs as a result of AI adoption, and 34% predict that AI will lower their cost base over the next five years. When it comes to other benefits, one-third of respondents each reported a greater use of predictive analytics (34%), increased employee capacity to handle workload volume (33%), and enhanced customer service and satisfaction (32%).

 

Investment and retail banks emerge as AI leaders

Investment banks are deploying a higher volume of new AI applications on average when compared to retail bank and insurance peers. They are also the most advanced in the implementation of training programmes: 54% have already implemented initiatives, compared with 46% in insurance and 48% in retail banks. Additionally, investment banks are most likely to use machine learning (63%) and image analysis (52%), whereas retail banks are more heavily deploying predictive analytics (71%) and virtual assistants (61%).

The report also found that banks and insurers in APAC are trendsetters when it comes to adoption, training and measurement. 61% reported that half or more of their workload is supported by AI, compared with North America and Europe (both 41%). Europe’s low usage is partly a reporting problem: Almost 10% either had no metrics to measure AI-application success, or had not been measured for long enough to report on. By way of contrast, all APAC respondents had functional reporting metrics. Notably, APAC prioritises reskilling and training initiatives, with 75% expecting an increased investment in people over the next five years to learn more AI skills and arm them with resources compared to 59% in North America and 37% in Europe.

 

The path forward: Upskilling frontline knowledge workers

Despite relatively slow adoption rates to date, the promise of AI holds clear with 86% of respondents saying they plan to increase AI-related investments into the technology over the next five years. However, greater AI adoption will ultimately be driven by how much financial services organisations invest into upskilling their workforce. This upskilling is required to get real value from democratising insights.

According to the data, the industry is at a halfway point when it comes to upskilling their employees, with 49% of respondents saying training initiatives for employees to better understand AI are currently in place. Another 42% have plans to implement such training.

With cost reduction plans working (for over a third) or forecast (another third) using AI, as the data shows, the way ahead revolves around driving new growth. AI is seen to be the new growth engine, and the key to unlocking its potential requires investing in talent. Financial services companies must lower the technology barrier for ordinary employees to capitalise on the productivity and innovation gains made possible by AI. This is the end goal for most of the financial services industry, and many others – to be able to react at the speed of thought to changing conditions, markets, and information – bringing us back to the point: Making the best use of time, because getting to understanding has not been a fast process in the history of business intelligence.

 

Business

HOW TECHNOLOGY IS MAKING AIRLINES SMARTER DURING LOCKDOWN

Captain Nadhem is the General Manager of Alpha Aviation UAE

 

2020 has provided challenges to all industries, but few have been as directly hit as air travel by the Covid-19 pandemic. Across the world, entire fleets have been grounded as international airports closed and travel bans were introduced worldwide.

Unfortunately, the challenges faced by airlines do not stop there. Airline economics dictate that planes be used as much as possible. For larger planes, this means keeping them in the air as close to 24/7 as is possible. For this reason, there simply aren’t enough dedicated storage facilities at global hub airports. At Frankfurt Airport for example, the tarmac on the 4th runway is now the home of many of the airport’s planes. It can also often take as long as 30 days to return a commercial jet to circulation after it has been mothballed.

As a result, many planes that are still in circulation have been transferred to the Indian sub-continent where air travel hasn’t been as badly disrupted. It will take some time for them to be rehomed to their previous routes if flight paths do reopen. In 2021, the aviation industry will also need to adapt and re-assess both its fleet sizes and operational strategies in order to re-build in the wake of this global crisis.

Pilots account for a key proportion of overhead costs and airlines will be constantly rethinking their pilot training strategy, which is likely to include a need to outsource and decentralise to maximise efficiency. At the same time, trained pilots will require training updates and renewals to their licenses, even as fleets are grounded.

Flight simulators have therefore assumed a crucial role in 2020. Usually developed to keep experienced crews sharp by creating challenging scenarios in safe environment for them to overcome, they have now become important across the industry for several reasons. Flying, like any other skill, requires constant practice to maintain the highest level of competency. That’s why airlines have recency rules that require pilots to perform a specified number of take-offs, landings and approaches within a certain period of time.

Advancements in simulator technology continue to bridge the gap between theory and reality. At Alpha Aviation we’ve recently invested in the new Alsim-AL172 flight simulator that features a Cessna 172 cockpit, with two seats and a flight deck. As pilots still need to clock up over 1,500 flying hours to receive their ATP certificate, advanced simulators like these will also be effective in providing pilot training without the operational costs of a real flight.

This year also highlighted the need for regulators to make changes to the training process. For example, there will need to be more reliance on e-learning in the initial cadet training and the acceptance of integrated technology in simulator training will also be important. Further adoption of Artificial Intelligence (AI) can also offer a vital competitive advantage.

AI technologies have already been widely adopted across the aviation industry. From facial recognition at airport passport security to baggage check-in and remote aircraft monitoring. For years these innovations have been streamlining processes, both for operators and customers. However, AI has a much greater potential beyond these practical applications.

Among other benefits, AI and machine learning algorithms excel at recognising patterns and are extremely efficient at collating data from the process of training cadets. As most flight simulators are already equipped with sensors that generate considerable amounts of data, this resource can now be used to assess pilot competency from the onset of training.

Powerful AI and machine learning systems can analyse hundreds of flight parameters and sort through thousands of hours of simulator data to produce findings that a human coach wouldn’t have been able to determine. For example, AI programmes can evaluate a pilot’s ability as they execute key manoeuvres and create a comprehensive assessment of a cadet’s strengths and weaknesses based on real-time data.

The data collected from these training sessions can also be analysed by AI programmes to evaluate how the cadets fly certain training routes, for example, considering their angle of descent and acceleration periods. From this, airlines can gather enough data to build a picture of each pilot’s unique flying style and determine the optimum routes for them to fly.

A crucial part of this assessment centres around the rate each pilot burns fuel. Real-time decisions about the throttle settings during take-off and the climb can have a significant impact on the amount of fuel burned during a flight. With airlines spending around 33 percent of their operational costs on fuel, reducing the rate that fuel is burned can have a considerable effect on the finances of an airline and its carbon footprint.

Airlines already use AI systems to collect flight data regarding route distance, altitudes, and aircraft weight to determine the amount of fuel needed for a flight. However, now the data collected from simulators can also be used to pair pilots to specific routes, based on optimum fuel usage. This will result in cost savings for the airline by optimising the potential of their pilot crew to reduce excess overheads.

As we continue to work directly with regulators and the airlines to further expand the use of technology and AI in the industry, our ability to continue to adapt and innovate in this crisis will hopefully mean clearer skies ahead.

 

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THE INEFFICIENT MARKETS THEORY

Fraser Thorne, CEO at Edison Group

According to accepted financial thinking The Efficient Market Hypothesis (EMH) asserts that, at all times, the price of a security reflects all available information about its fundamental value.  So current prices are the best approximation of a company’s intrinsic value.

If that is true then why are so many companies being taken over at values of up to 70% more than their stock market price?.  What is the market missing?  Either accepted economic thinking is wrong or it is suffering from a period of abnormality or maybe something more fundamental is taking place.  Something which challenges the hypothesis of existing theories as to how share prices are created.

In recent months FTSE 100 businesses G4S and Royal Sun Alliance (RSA) have both been bid targets with insurer Hastings Group Holdings plc and Urban&Civic plc falling to earlier bid, following other leading industry names such as Macarthy & Stone .  Even the doyenne of roadside assistance the AA was finally taken off the market following a 6 year downhill journey.

A common feature is the gulf between the company’s stock price when the bid was launched, and the stock price offered by the potential acquirer. Yet if companies took advantage of the IR resources at their disposal, which have been significantly enhanced as digital capabilities have been developed as a result of COVID-19, this share price gap would have been considerably narrower or the companies might not have been the subject of a bid at all – potentially saving millions in defence fees.

Struggling stock prices have, of course, been a key stock market feature during the pandemic. Like many listed companies, G4S´s stock price fell sharply in the spring and then gradually recovered in the early summer to around 110p – still well short of the 200p at the start of this year – when Gardaworld made its first bid of 145p. Gardaworld’s final bid in December of 235p a share, was not enough to win the competition with Allied Universal trumping them at 245p cash. A 70% premium to G4S’s share price when Gardaworld’s first bid was made. The stock now trades at 257p implying some believe the bidding war may rumble on.

Similarly, Urban&Civic received a bid of 345p from Wellcome Trust, a 64% premium on its trading price at the time, RSA a joint bid from Intact Financial and Tryg, of 685p, a 49% premium and Hastings a 250p bid from Dorset Bidco, a 47% premium.

While the AA bid was at a premium of 40% to its price 4 months prior or 230% from its lows in February.  Even serial underperformer Talk Talk was taken over at a 16% premium.

Having reviewed a number of deals over the past six months most had a bid premium of over 40%+ which compares with an average of 15% for the previous two decades.

Takeovers are natural part of corporate development and a key requirement for markets to function efficiently.  But their value to shareholders has to be set against the recognition of the underlying value of the business before the bid is made.  A premium is normal and is normally required for control but what is most notable is the scale of such premiums.  Such price mismatches challenge the foundations of economic thinking, the market is not efficient.

A 10% bid premium is good, 15% very good and anything north of that is exceptional but this depends on the underlying price before the first bid is made.  Numbers in excess of 20% suggest the underlying stock is mispriced and therefore the stock market is inefficient.  This is hard to fathom in age of open access to so much information but the numbers demonstrate a dislocation between the stock markets value what others are prepared to pay for exactly the same assets.

True, bid prices are not always representative of the value of a business and its future cash flows might improve as a result. But one has to review the fundamentals of stock market valuations when the world’s largest security business can be undervalued by 200%+. Does the market lack the relevant information about the business outlook to make the same assessment as the bidder?  Is it that the market is dominated by analysts whose collective glass is half empty?  Or maybe it is the risk averse nature of large, bureaucratic investment houses who hope to demonstrate their precise calculations to reassure fund holders that they are looking after their savings.

Some of the quoted discount results from the public/private differential of the cost of capital and the tax treatment of debt v equity.  But perhaps a more obvious challenge has to be met by the companies and their boards’ – make sure everyone recognises your value, not just a potential bidder.

With as much investment now funded via debt (PE) as by quoted equity financial theories need a much wider lense. The efficient market hypothesis can only be applied to the market if investors and analysts incorporate the activity of the wider economic and investmsnt market.  This must include the valuations applied to private companies.  It is a great irony that in the age of the internet he time when more and more information is freely available to all markets are seemingly becoming less efficient.

The cost of private v quoted capital plays a part as does the massive growth of private equity v quoted funds, with active money halving in percentage terms in the last 20 years.

EMH theory came to prominence at a time of relative stock market stability, before international takeovers had come into vogue and in a time of greater higher interest rates.

 

US Mergers since 1897

According to Keynes “markets can remain irrational longer than you can stay solvent” and while they may re balance in the long run they can experience long periods of price dislocation.  We are not talking days but months or even years in some extreme cases.  Long enough for those closest to the business (the board) to highlight the error and try to rebalance it.

If the stock market cannot see the value opportunity then maybe it is not being given the full picture.   When that is the case then it is the obligation of the board to put the market right, yes the business needs to deliver what it promises but the other side of that is to highlight to investors how they will long term returns for shareholders.

While public perception may be that M&A deals and takeovers are decided by thrusting company directors, brave bankers and diligent lawyers, heroically fighting their corners in smoke filled boardrooms.

The reality is that these situations can only arise either when resources are scarce ie a mega merger between two dominate indsurty players scarping over a low growth or shrinking market or if one neglects its duty to achieve a proper value for its shares in the most public of arenas the stock market.

Certainly, the current gulf between share and bid prices suggests that management teams are not doing enough to properly communicate the value of their business to the wide variety of investors, which have holdings in their company.

In these uncertain economic times, clear and direct communication with investors is more important than ever. But not only do management teams need to communicate effectively with their existing investors, reaching out to potentially new investors who are likely to back an existing management team is also important.

A healthy share register is a diverse register incorporating all types of investors from retail through to the large institutions.  This means reaching out to a wide and fragmented audience.  The modern investment landscape is increasingly characterised by new and exciting pools of capital.  The growing significance of these new pools and the value of funds they represent is magnified as a result that active funds have shrunk as a percent of global funds under management by up to 30% in the last 20 years.  Boards should focus on building a more diverse and engaged share register, reach out beyond the more mainstream institutional investors to include, family offices, private wealth managers and the end individual investor herself.  To ignore this part of the market could be the difference between success and failure in a bid, just ask the board of GKN.

 

To address these issues, the IR industry has been adopting to a new level of innovation and tech-enabled solutions to respond effectively to these demands. For example, Edison has developed a new market-leading digital approach, which harnesses the latest in data and tech-driven tools, effectively transforming and enhancing the firm’s IR capability to not only efficiently reach out to existing holders but also to target new investors, which in an unwelcome bid situation could make all the difference between independence and redundancy.

Edison’s starting point is to monitor the behaviours of tens of thousands of investors by using smart targeting, with algorithms identifying not just interest but interest with intent to buy. These ‘propensity to purchase signals’ are detected via Edison’s digital content tracking system, InvestorTrack® and layered over market activity and fin depth knowledge of funds flows.

The recent spate of high premium bids highlights management failures to invest in their capital market communications.  It is not sufficient to concentrate on the top holders, nor to assume that exhaustive meetings with the sell side is an effective way to get your message carried to the wider market, in the format you want.

Initiating a bid is expensive, even more so defending one.  The combined advisory fees alone in the G4s bid are estimated to be in excess close to $30m or close to the annual IR budget of the combined FTSE100.  If the FTSE was repriced to close the average bid premium of the last two decades then it could increase in value by more than £300bn.

So, the choice appears straightforward: implement a long-term IR strategy, utilising all the modern digital methods now available to robustly communicate a company’s commercial case and strategy so the business is as fully valued as possible, or neglect this and risk a future bid and if it transpires then spend potentially millions of shareholder funds in fees in a possibly futile attempt to protect the company’s independence. If I was part of a senior management team, I know which option I would choose..

 

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