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Rating and ranking firms with fuzzy expert systems: the case of Camuzzi

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  • Magni, Carlo Alberto

Abstract

In this paper we present a real-life application of a fuzzy expert system aimed at rating and ranking firms. Unlike standard DCF models, it integrates financial, strategic and business determinants and processes both quantitative and qualitative variables. Twenty-one value drivers are defined, concerning the target firm (strategic assets in place and expected financial performance), the acquisition (synergies, quality of management) and the sector (intensity of competition, entry barriers). Their combination via “if-then” rules leads to the definition of an output represented by a real number in the interval [0,1]. Such a number expresses the value-generating power of the target firm inclusive of synergies with the bidder (Strategic Enterprise Value). The system may be used for rating and ranking firms operating in the same sector. A regression analysis using hostile takeovers multiples may be employed to translate the score into price. The real-life case refers to Camuzzi (a natural gas distributor), acquired by Enel, the Italian ex monopolist of electric energy.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5646.

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Date of creation: Jun 2007
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Handle: RePEc:pra:mprapa:5646

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Keywords: Corporate finance; firm; rating; ranking; expert system; fuzzy; evaluation;

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References

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  1. Carlo Alberto Magni & Stefano Malagoli & Giovanni Mastroleo, 2006. "An Alternative Approach To Firms' Evaluation: Expert Systems And Fuzzy Logic," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 195-225.
  2. Carlo Alberto Magni, 2009. "A fuzzy expert system for solving real-option decision processes," PROYECCIONES FINANCIERAS Y VALORACION 005677, MASTER CONSULTORES.
  3. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
  4. Magni, Carlo Alberto, 2002. "Investment decisions in the theory of finance: Some antinomies and inconsistencies," European Journal of Operational Research, Elsevier, vol. 137(1), pages 206-217, February.
  5. Stefano Malagoli & Carlo Alberto Magni & Giovanni Mastroleo, 2007. "The use of fuzzy logic and expert systems for rating and pricing firms: A new perspective on valuation," Managerial Finance, Emerald Group Publishing, vol. 33(11), pages 836-852.
  6. Carlo Alberto Magni & Giovanni Mastroleo & Marina Vignola & Gisella Facchinetti, 2009. "Strategic options and expert systems: a fruitful marriage," PROYECCIONES FINANCIERAS Y VALORACION 006122, MASTER CONSULTORES.
  7. Mei-Fang Chen & Gwo-Hshiung Tzeng & Tzung-I Tang, 2005. "Fuzzy Mcdm Approach For Evaluation Of Expatriate Assignments," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 277-296.
  8. Jing Liu, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, 03.
  9. Richard G. Sloan, 1996. "Using Earnings And Free Cash Flow To Evaluate Corporate Performance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(1), pages 70-79.
  10. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
  11. Carlo Alberto Magni, 2009. "Modeling excess profit," PROYECCIONES FINANCIERAS Y VALORACION 005522, MASTER CONSULTORES.
  12. Carlo Alberto Magni, 2003. "Decomposition of Net Final Values: Systemic Value Added and Residual Income," Bulletin of Economic Research, Wiley Blackwell, vol. 55(2), pages 149-176, 04.
  13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  14. Miao-Ling Wang & Hsiao-Fan Wang & Chih-Lung Lin, 2005. "Ranking Fuzzy Number Based On Lexicographic Screening Procedure," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 663-678.
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Cited by:
  1. Abdul Suleman & Fatima Suleman, 2012. "Ranking by competence using a fuzzy approach," Quality & Quantity: International Journal of Methodology, Springer, vol. 46(1), pages 323-339, January.

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