Sum-of-the-Parts Valuation - SOTP
What Is the Sum-of-the-Parts Valuation - SOTP?
The sum-of-the-parts valuation (SOTP) is a course of esteeming a company by figuring out what its aggregate divisions would be worth on the off chance that they were veered off or acquired by another company.
The valuation gives a scope of values to a company's equity by conglomerating the standalone value of every one of its business units and showing up at a single total enterprise value (TEV). The equity value is then derived by adjusting the company's net debt and other non-operating assets and expenses.
The Formula for Sum-of-the-Parts Valuation - SOTP Is
The most effective method to Calculate Sum-of-the-Parts Valuation - SOTP
The value of every business unit or segment is derived separately and not entirely set in stone by quite a few analysis methods. For instance, discounted cash flow (DCF) valuations, asset-based valuations and multiples valuations utilizing revenue, operating profit or profit margins are methods used to value a business segment.
What Does the SOTP Tell You?
Sum-of-the-parts valuation, otherwise called breakup value analysis, assists a company with grasping its true value. For instance, you could hear that a youthful technology company is "worth more than the sum of its parts," meaning the value of the company's divisions could be worth more assuming that they were sold to other companies.
In circumstances, for example, this one, bigger companies can exploit collaborations and economies of scale inaccessible to more modest companies, empowering them to expand a division's profitability and open unrealized value.
The SOTP valuation is most ordinarily used to value a company contained business units in various industries since valuation methods contrast across industries relying upon the idea of revenue. It is feasible to utilize this valuation to shield against a hostile takeover by demonstrating the company is worth more as a sum of its parts. It is likewise conceivable to involve this valuation in circumstances where a company is being revalued after a restructuring.
The Sum-of-the-parts valuation is otherwise called the breakup value as it surveys what individual segments would be worth in the event that the company was broken up.
Illustration of How to Use the Sum-of-the-Parts Valuation - SOTP
Think about United Technologies (NYSE: UTX), which said it will break the company into three units in late 2018 — an aviation, elevator and building systems company. Utilizing the 10-year median enterprise value-to-EBIT (EV/EBIT) numerous for peers and 2019 operating profit projections, the aviation business is valued at $107 billion, the elevator business at $36 billion and building systems business $52 billion. Accordingly, the total value is $194 billion. Lessing out net debt and other things of $39 billion, the sum-of-the-parts valuation is $155 billion.
The Difference Between the SOTP and Discounted Cash Flow - DCF
While both are valuation devices, the SOTP valuation can incorporate a discounted cash flow (DCF) valuation. That is, esteeming a segment of a company might be finished with a DCF analysis. In the interim, the DCF utilizes discounted future cash flows to value a business, project or segment. The current value of expected future cash flows is discounted utilizing a discount rate.
Limitations of Using Sum-of-the-Parts Valuation - SOTP
The sum-of-the-parts (SOTP) valuation includes esteeming different business segments, and more valuations accompany more inputs. Too, SOTP valuations don't consider tax suggestions, prominently the ramifications engaged with a spinoff.
Features
- SOTP empowers a company to lay out a helpful measure of its value which can be exceptionally pertinent on account of a hostile takeover or a restructuring.
- SOTP is often put to utilize when a company is a conglomerate and has business units in various industries.
- SOTP is the most common way of figuring out what the individual divisions of a company would be worth on the off chance that they were veered off or bought by an alternate company.
