What are some examples of doing "sum of parts valuation models"?

Can you guys run me through a couple examples of when you have done this, or an example of what exactly this type of valuation is. Want to make sure it aligns with what I've done at my internship before I put it on my resume.

 
rpc:

It's used when a company has unrelated business segments or when a company could sell itself division by division instead of wholly. Could use multiples or DCF to value each division, then simple add them together at the end.

need to take into account tax implications of spinning off.
 
kidflash:
rpc:

It's used when a company has unrelated business segments or when a company could sell itself division by division instead of wholly. Could use multiples or DCF to value each division, then simple add them together at the end.

need to take into account tax implications of spinning off.

If you're actually spinning a segment then yes; you don't generally do this when just doing an SOTP valuation though.

The whole crux of the SOTP argument is "x Company is undervalued because the performance of one unit is obscuring another, or the market doesn't understand how to value these disparate businesses as one target Company"

e.g. HighGrowthUnit should trade at 20x EBITDA based on comps / DCF / etc....LowGrowthUnit should trade at 6x EBITDA based on the same....so WholeCo should trade at 13x (assuming same size) but is only trading at 10x....WholeCo is undervalued

 
Best Response

This valuation method is most relevant when a large conglomerate has numerous unrelated lines of business. GE is the textbook example here, just like someone already mentioned. They produce everything from refrigerators and dishwashers to literal rocket engines, but they also have a medical services division, a very famous finance arm, and a dozen other businesses as well.

You can't expect to get the same multiples or find any precedents that remotely fit a company with such broad operations, so instead you can either value each of the firm's businesses using one of the common valuation methodologies, sum up the value of the parts, and derive a total value ... or read the corporate filings for a revenue breakdown by each division, apply a relevant industry multiple to each division, then sum up the values of each division's revenue percentage times its appropriate multiple.

Hope this is helpful.

I am permanently behind on PMs, it's not personal.
 

I actually have the same question - should we consider using (1) consolidation (2) equity method (3) cost method when adding them together to get the implied EV of the parts? Any monkey can double check my understanding?

 

Mr. Snake, thanks for your reply.

I can understand the adjustments for growth part, but not sure that you need to adjust the multiple for different margins. Also, the divisions fall in pretty different industries. Suppose both divisions have $100mm of sales each, and division A has $30mm of EBITDA and division B has $50mm of EBITDA. Even if you apply the same multiple, you still come to a higher EV for division B. Not sure that you need to double compensate division B by giving it a higher multiple.

Please help if any one has further suggestions on how to make this work. Thanks.

 

Aspernatur sunt magni numquam ducimus corporis mollitia. Tempora incidunt ea non repudiandae incidunt numquam. Sequi ut deserunt cupiditate vero.

Et aut sit autem et quae non maiores maxime. Eos quod voluptas harum omnis id molestiae maxime. Itaque voluptates illo unde et cupiditate voluptates tempore.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Betsy Massar's picture
Betsy Massar
99.0
5
kanon's picture
kanon
98.9
6
dosk17's picture
dosk17
98.9
7
GameTheory's picture
GameTheory
98.9
8
CompBanker's picture
CompBanker
98.9
9
DrApeman's picture
DrApeman
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”