Dear,
Two weeks ago I was in London for presenting the GAP Analysis of a Bank Analyzer implementation in an Investment Bank.
By the way, I love the City, even when I have to spend two hours for crossing the passport control at the Gatwick Airport.
I have mentioned here that, in my opinion, Bank Analyzer is probably the finest piece of software ever developed by SAP, but for finding its real advantages we have to look at specific, non-trivial scenarios.
In this particular case, we found a real challenge in the management of mergers and acquisitions. In this business is very usual a finance process called “Leveraged buyout”.
Simplifying, it is the acquisition of a company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.
On this model, the company being acquired is used as collateral for the loan. Borrowing the money, the investors can make large acquisitions reducing Capital commitment. The necessary Capital is mainly provided by the investment Bank, which is effectively becoming a very significant stakeholder in the deal.
From a classic perspective, the investment bank is giving a loan and receiving as collateral the assets of the acquired company, but we are going to see that the reality is a little bit more complicated, but also more interesting.
The value of the collateral is the value of the acquired company, but the value of the company fluctuates every day. Every P/L relevant transaction will produce a change on the value of the company, and consequently, in the collateral value, and the Investment Bank Capital Consumption.
Some weeks ago, I described in this forum some proposals for alternative Accounting representation, enhancing the classic approach; I called them “Underlines and Collaterals Accounting System”.
sapbank.blogspot.com/2013/07/collaterals-and-underlines-accounting.html
sapbank.blogspot.com/2013/07/collaterals-and-underlines-accounting_27.html
The basic idea behind this proposal is looking at the value generation of the business process, and not limiting it to the classic accounting value. The Leveraged buyout process is a good example of the utility of this approach.
Take into account that from the Investment Bank perspective, managing the company is managing the collateral of its exposure.
In this process, all the risk relies in the management of the acquired company. If the company performs well, the borrowers will be able of paying back their obligations to the investment bank with the profits of the acquired company.
If not, the investment bank will have to use its rights on the collateral, but remember, the collateral is the acquired company. If it’s not performing well, the borrowers will not fulfill their obligations, but the collateral will also suffer a significant hair-cut.
As you see, the critical factor is controlling the performance of the acquired company, and controlling the performance requires integration. Again, the main competitive advantage of the SAP Banking business suite.
A seamless integration of this process would require integrating the net value (Capital, Reserves and P/L) of the acquired company with the Collateral Primary object of Bank Analyzer. With this integration, the investment bank has an updated value of its assets collateral, and a clear estimation of the investors’ capacity of paying their obligations.
The opportunities of detailed management of this process in Bank Analyzer are abundant. For instance, in case of a very critical deal, we could integrate the whole Balance Sheet and P/L of the acquired company in the AFI Sub-ledger, and transferring its net value as value of the collateral in the Primary Object.
The more we move deeper into the Financial Crisis, the more important efficient Capital management will be. It’s in this environment where the holistic vision of SAP Banking can prove its competitive advantages.
Looking forward to read your opinions.
K. Regards,
Ferran.
Two weeks ago I was in London for presenting the GAP Analysis of a Bank Analyzer implementation in an Investment Bank.
By the way, I love the City, even when I have to spend two hours for crossing the passport control at the Gatwick Airport.
I have mentioned here that, in my opinion, Bank Analyzer is probably the finest piece of software ever developed by SAP, but for finding its real advantages we have to look at specific, non-trivial scenarios.
In this particular case, we found a real challenge in the management of mergers and acquisitions. In this business is very usual a finance process called “Leveraged buyout”.
Simplifying, it is the acquisition of a company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.
On this model, the company being acquired is used as collateral for the loan. Borrowing the money, the investors can make large acquisitions reducing Capital commitment. The necessary Capital is mainly provided by the investment Bank, which is effectively becoming a very significant stakeholder in the deal.
From a classic perspective, the investment bank is giving a loan and receiving as collateral the assets of the acquired company, but we are going to see that the reality is a little bit more complicated, but also more interesting.
The value of the collateral is the value of the acquired company, but the value of the company fluctuates every day. Every P/L relevant transaction will produce a change on the value of the company, and consequently, in the collateral value, and the Investment Bank Capital Consumption.
Some weeks ago, I described in this forum some proposals for alternative Accounting representation, enhancing the classic approach; I called them “Underlines and Collaterals Accounting System”.
sapbank.blogspot.com/2013/07/collaterals-and-underlines-accounting.html
sapbank.blogspot.com/2013/07/collaterals-and-underlines-accounting_27.html
The basic idea behind this proposal is looking at the value generation of the business process, and not limiting it to the classic accounting value. The Leveraged buyout process is a good example of the utility of this approach.
Take into account that from the Investment Bank perspective, managing the company is managing the collateral of its exposure.
In this process, all the risk relies in the management of the acquired company. If the company performs well, the borrowers will be able of paying back their obligations to the investment bank with the profits of the acquired company.
If not, the investment bank will have to use its rights on the collateral, but remember, the collateral is the acquired company. If it’s not performing well, the borrowers will not fulfill their obligations, but the collateral will also suffer a significant hair-cut.
As you see, the critical factor is controlling the performance of the acquired company, and controlling the performance requires integration. Again, the main competitive advantage of the SAP Banking business suite.
A seamless integration of this process would require integrating the net value (Capital, Reserves and P/L) of the acquired company with the Collateral Primary object of Bank Analyzer. With this integration, the investment bank has an updated value of its assets collateral, and a clear estimation of the investors’ capacity of paying their obligations.
The opportunities of detailed management of this process in Bank Analyzer are abundant. For instance, in case of a very critical deal, we could integrate the whole Balance Sheet and P/L of the acquired company in the AFI Sub-ledger, and transferring its net value as value of the collateral in the Primary Object.
The more we move deeper into the Financial Crisis, the more important efficient Capital management will be. It’s in this environment where the holistic vision of SAP Banking can prove its competitive advantages.
Looking forward to read your opinions.
K. Regards,
Ferran.
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