Sum of Parts Valuation: Conglomerate Analysis Guide

Sum-of-the-parts (SOTP) valuation is a method that values a company by calculating the separate worth of each business segment and adding them together. This approach is essential for analyzing conglomerates, holding companies, and diversified businesses where a single valuation multiple does not capture the true value.

What is Sum-of-Parts Valuation?

SOTP valuation answers: What would each business unit be worth if it operated as a standalone company? The total enterprise value is the sum of all segment values, minus corporate overhead and net debt.

Key concept: The conglomerate discount occurs when a diversified company trades for less than the sum of its parts. SOTP analysis helps identify these opportunities where the market may be undervaluing the whole.

When to Use SOTP

Conglomerates: Companies like Berkshire Hathaway, General Electric, or 3M
Holding companies: Investment vehicles with multiple subsidiaries
Spin-off candidates: Companies considering separating business units
M&A targets: Assessing potential breakup value for acquirers
Diversified companies: Firms with segments in different industries

Step 1: Identify Business Segments

Companies report segment data in their annual reports (10-K filings). Look for:

Revenue by segment
Operating income or EBITDA by segment
Assets by segment
Segment descriptions and competitive positioning

Example: Diversified Industrial Company

Assume Company XYZ has four segments:

Segment	Revenue	EBITDA	Margin
Healthcare Equipment	$8.0B	$2.0B	25%
Industrial Automation	$5.0B	$1.0B	20%
Consumer Products	$4.0B	$600M	15%
Financial Services	$3.0B	$900M	30%
Total	$20.0B	$4.5B	22.5%

Step 2: Select Comparable Companies for Each Segment

Find pure-play public companies in each segment's industry to determine appropriate valuation multiples.

Segment Peer Groups

Healthcare Equipment peers: Medtronic, Abbott, Stryker, Boston Scientific

Median EV/EBITDA: 15x

Industrial Automation peers: Rockwell, Emerson, Honeywell, ABB

Median EV/EBITDA: 12x

Consumer Products peers: P&G, Colgate, Church & Dwight, Clorox

Median EV/EBITDA: 14x

Financial Services peers: Synchrony, Ally Financial, Capital One

Median EV/EBITDA: 8x

Step 3: Value Each Segment

Apply the relevant multiple to each segment's financials:

Segment	EBITDA	Multiple	Segment Value
Healthcare Equipment	$2.0B	15x	$30.0B
Industrial Automation	$1.0B	12x	$12.0B
Consumer Products	$600M	14x	$8.4B
Financial Services	$900M	8x	$7.2B
Gross SOTP Value			$57.6B

Step 4: Adjust for Corporate Costs

Corporate headquarters have costs not allocated to segments. These must be subtracted:

Corporate G&A expenses
Executive compensation
Centralized functions (legal, HR, IT)
Public company costs

Example: Company XYZ has $300M in unallocated corporate costs

Corporate cost capitalized at 10x = $3.0B reduction

Adjusted SOTP = $57.6B - $3.0B = $54.6B Enterprise Value

Step 5: Calculate Equity Value

To get equity value per share:

Start with SOTP Enterprise Value: $54.6 billion
Subtract net debt: $54.6B - $8.0B = $46.6B
Add excess cash: $46.6B + $2.0B = $48.6B
Divide by shares outstanding: 400 million shares
SOTP Value = $121.50 per share

Finding the discount: If the stock currently trades at $95, there is a 22% conglomerate discount. This could represent an investment opportunity if you believe the market will eventually recognize the true value or if a spin-off/breakup is possible.

The Conglomerate Discount

Diversified companies often trade at 10-30% discounts to their sum-of-parts value. Reasons include:

Management complexity: Running multiple businesses is difficult
Capital allocation: Cash may flow to weaker segments
Investor preferences: Fund managers prefer pure-plays
Hidden losses: Weak segments can drag down strong ones
Lack of transparency: Segment reporting may obscure performance

Catalysts That Unlock Value

SOTP discounts can close when:

Spin-offs: Separating businesses into independent companies
Divestitures: Selling segments to strategic buyers
Activist involvement: Pressure to restructure
Management changes: New leadership focused on value creation
Industry consolidation: Strategic acquirers value individual businesses

Real-World Example

When General Electric announced plans to split into three companies (aviation, healthcare, energy), the stock jumped as investors anticipated the conglomerate discount closing.

SOTP for Holding Companies

Holding companies like Berkshire Hathaway require modified SOTP analysis:

Value public stock holdings at market prices
Value wholly-owned subsidiaries using comps or DCF
Add cash and investments
Subtract holding company debt

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Limitations of SOTP

Segment data quality: Company reporting may lack detail
Transfer pricing: Internal transactions can distort segment profitability
Synergy loss: Standalone businesses may have higher costs
Tax implications: Breakups can trigger tax liabilities
Multiple selection: Choosing appropriate comps requires judgment

SOTP Sensitivity Analysis

Test your valuation under different multiple assumptions:

Scenario	Healthcare	Industrial	Consumer	Financial	SOTP Value
Bear	12x	10x	11x	6x	$97
Base	15x	12x	14x	8x	$122
Bull	18x	14x	16x	10x	$148

Summary

Sum-of-the-parts valuation is essential for analyzing conglomerates and diversified companies. By valuing each business segment independently using appropriate industry multiples and adding them together, you can identify potential conglomerate discounts where the market undervalues the whole. Key steps include identifying segments, selecting peer companies, applying relevant multiples, adjusting for corporate costs, and calculating per-share equity value. Watch for catalysts like spin-offs or activist involvement that could unlock hidden value.