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The IUP Journal of Applied Finance
Rating and Ranking Firms with Fuzzy Expert Systems: The Case of Camuzzi
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This paper presents a real-life application of a fuzzy expert system aimed at rating and ranking firms. Unlike standard Discounted Cash Flow (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 prospective 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 (here named Strategic Enterprise Value). The system may be used for rating and ranking firms operating in the same sector. A regression analysis, using hostile takeover 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.

 
 
 

This study presents an expert system aimed at evaluating firms. To this end, the lines of reasoning of experts are replicated, taking into account the financial, business, and strategic determinants. The approach followed results in a method of rating and ranking firms. The model presented may also be used to ascertain the impact of a particular management's decision on value creation or to compensate managers on the basis of their performance. The model has been applied to the case of Camuzzi, recently acquired by Enel, the Italian ex-monopolist of electric energy.

The evaluation derives from the use of `if-then' rules in a fuzzy logic environment. While our approach is just a first attempt to develop a new methodology for appraising firms and business units, we think that this path is fruitful for dealing with complex situations where a great number of value drivers must be taken into account, both qualitative and quantitative, and/or where explicit account of their interrelations must be taken for a better description of the evaluation process.

While it is an alternative to DCF techniques, the structure of the model proposed here is logically consistent with it as well as with a strategic management conceptual framework. As for DCF techniques, the standard computation of the enterprise value is given by the present value of the free cash flow to firm:

 
 
 

Applied Finance Journal, Discounted Cash Flow, DCF, Strategic Enterprise Value, Strategic Determinants, Fuzzy Logic Environment, Strategic Management, Adjusted Present Value, APV, Top Management Teams, TMTs, Organizational Learning, Strategic Enterprise Value.