corporate valuation models

Yesterday, a couple of my friends came home while they were on their way to Austin, TX to see family. The common factor between all of us was that we had all studied Management at the Indian Institute of Management (IIM). IIM is one of the best educational institutes for business studies in the eastern hemisphere of this planet. On the short road-trip from my home to the O'Hare airport, there were 4 b-school graduates in my car. Naturally, the discussions veered towards current events, investments, financial markets and such. At one point, I stated that the US financial markets, especially equity, are complex compared to the Indian markets. I added that it is hard to derive revenue/profitability predictions and hence stock price predictions due to that complexity. I stated that the number and complexity of brands in India is very low. That is, there are fewer brands in India and the value of those brands for marketeers, shareholders and customers can be established easily. The response I got from my fellow travelers was a count of famous brands from India. Hamam, Dabur, Reliance, Airtel, etc. The discussion was not towards establishing any point or for proving any technical fact and was casual banter. No one really delved deeper beyond stating names, counts etc. However, the counts and the names prove the point that, traditionally, brands in India have not been complex or many. One can count national and some local brands on a small trip to the airport. Almost every brand has a single value proposition and large mass appeal. Compare that to United States. A brand like Sara Lee is made up of range of other brands. Each brand has equity amongst diverse set of customers. Fidelity means different things to different people and customer groups. Fidelity's markets are amongst individuals, institutions, other financial institutions and it provides a range of products to every customer group. In such a case, what is the process to confidently propose a relation between broad market factors such as trade balance, credit environment, job market and individual corporate performance? For less complicated corporate structures where the corporation has few brands, markets are not diverse, sales (revenues) can be easily attributed to corporate efforts. However, in the developed markets such as United States and now increasingly so in India, it is not straightforward to link performance to market factors. Analysis gets complicated. The confidence of decisions (i.e. probability of accuracy) is lower. To get better quality decisions, one has to have better tools. One of my companions did mention that one needs to outsource some of the decision making inputs to outsiders. That is, it is important to bank on high quality institutional research done outside your realm to make your decisions about investments. Now lets include commodities, fixed income and other trade-able things (complex things such as catastrophe bonds, weather futures), then investment decision making becomes even more complicated. Thats the reason why the financial analysis industry even exists. Really, if you take a look at the details of a firm dealing with investments, you will notice the level of analysis and research that goes into every decision support activity they undertake. Recently, a business associate demonstrated a cutting edge corporate valuation model for the middle market that deals with the exact same challenge of complexity. This model is based on a number of parameters of current corporate performance and economic environment factors. With great confidence, we executed back tests after back tests of market events from the recent past and simulated possible scenarios for a clutch of middle market companies that Saven works with. It was thrilling to see how a quantitative model accurately predicts potential corporate performance changes due to functional actions such as new product launches or operational efficiency improvement or due to economic factors such as overnight interest rates (set by the Fed). As I understood, this valuation model not only models known and broadly understood factors I mentioned but also has the ability to model newly conceptualized factors. This is of most interest to our customers at Saven. Most of our customers have their custom valuation models - some quantitative and others driven by proprietary qualitative processes. However, no one has a framework of modeling performance in a dark alley. This is especially pertinent in the online, Internet driven business models that abound. In this scenario, where companies engage with their customers through the online media, business models change often. Especially, middle market companies have to deal with a lot of ambiguity. Would it not be nice to have a model that can predict the future value of functional actions and economic environment today. I am betting on it. To my peers and customers, I have made the case for including this valuation tool into FundAide, our online platform for the asset management industry. It works like a charm! FundAide is online; users (subscribers) of this platform can easily use this application much like they can choose to use iLike in Facebook. I cannot wait to bring our first beta customers online with this and other tools. More on this later.