Credibilistic Valuation of Merger and Acquisition Targets with Fuzzy Real Options

Abstract

AbstractFuzzy real options modeling has developed greatly in the last decade. Fuzzy real options are for real investments what financial options are for investments on financial assets. Main differences from the valuation perspective include, e.g., that real investments are often unique, and their real option value cannot be derived from market data. The valuation of real investments typically uses investors’ in-house knowledge, which can be combined with real-time market data. The investor in our case is an acquiring company with a task to ex-ante evaluate potential acquisition target companies for which the acquirer obtains real options to create value through managerial flexibility arising from the merger and acquisition process, where strategic and economic capital of the acquired and the target company are put together. In this paper, we extend the credibilistic fuzzy pay-off method to interval-valued fuzzy trapezoidal numbers with an optimism–pessimism measure and discuss how it can be integrated into a digital coaching tool developed by the authors. We demonstrate through a numerical example with R code how the method can be used in valuing corporate acquisition targets with real options available to an acquiring company together with an optimism–pessimism level of analysts about the value-creation through managerial actions.KeywordsCredibility theoryOptimism–pessimism measureReal optionsInterval-valued fuzzy numbersMergers and acquisitions