Sum of the parts: when a company is worth more broken up
A single multiple applied to a company doing four unrelated things is a number that describes none of them.
Value a business that is really several businesses.
How Sum of the parts: when a company is worth more broken up works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Why the debt is the engine
Put in 30, borrow 70, secure the loan against the company you are buying. A 30% rise in the business doubles your money. The same arithmetic works in reverse, which is why buyouts fail loudly.
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One multiple cannot describe four businesses
A company with a fast-growing software arm and a declining industrial one gets a single blended P/E, and that number is wrong for both. Sum of the parts values each division against its own peers, on its own multiple.
- 2
Then subtract the things that belong to nobody
Add up the divisions, then take off net debt and the cost of head office, which produces nothing and consumes cash. What is left is the theoretical equity value if the parts were separated.
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The gap has a name, and often a good reason
Conglomerates frequently trade below the sum of their parts. That is not automatically an opportunity. Head office may be destroying value, the parts may be genuinely hard to separate, or a controlling shareholder may have no intention of ever unlocking it.
A discount that has persisted for fifteen years is not a mispricing. It is the market's settled and probably correct opinion about management.
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The catalyst is the whole investment case
Value alone does nothing. What closes the gap is a spin-off, a sale, an activist, or a new chief executive. Without one of those, you can be right about the value and wait forever.
Ordinary. The market expects steady, unremarkable growth.
You can name the catalyst that would close the discount, and who would cause it.
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A single multiple applied to a company doing four unrelated things is a number that describes none of them.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.