Sum-of-Parts Valuation

What is it?

Sum-of-parts is an analytical approach used to value a multi-business company. The business is broken down to individual business units. Each business is valued separately, as a DCF valuation within the current organization, estimating the value of any synergies and comparing this to the price that each business would attract from other owners.

To the sum of the business units is added the corporate costs, assets and liabilities. The total is then compared to the market-cap of the company to assess whether it is vulnerable to take-over and break-up by acquirers.

Every multi-business company should run a sum-of-the parts valuation model of their company, regularly updating it. This tool will not only give then a quantitative way to prioritise, they can also use it to look at their business from a raider’s perspective, and identify how to release value before someone else does it to them.

When is it useful?

An Example?


How do you do the analysis?

1) Determine the value of each business units, usingh a combination of Discounted cashfolow, multiple ans asset-based valuation

2) Deduct the value of the corporate centre

3) Add non-operating assets (e.g. cash, marketable securities)

4) Deduct non-operating liabilities (e.g. debt, pension)

5) This gives you the implied market capitalisation

6) Compare to current market cap to determine conglomerate discount

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How can you adapt this concept?