What Is the Sum-of-the-Parts Valuation – SOTP?

The sum-of-the-parts valuation (SOTP) is a process of valuing a company by determining whꦫat its aggregate divisions would be worth if they were spun off or acquired by ano💦ther company.

The valuation provides a range of values for a company's equity by aggregating the standalone value of each of its business units and arriving at a single total enterprise value (TEV). The equity value is then derived by adjusting the company's net debt and other 澳洲幸运5开奖号码历史查询:non-operating assets and expenses. Ne♋t debt = gross💮 debt less cash and equivalents.

The Formula fo❀r Sum-of-the-Parts Valuation – SOTP Is

 $\begin{aligned} &\text{SOTP} = N_1 + N_2 + \dotso + ND - NL + NA \\ &\textbf{where:}\\ &N_1=\text{Value of first segment}\\ &N_2=\text{Value of second segment}\\ &ND=\text{net debt}\\ &NL=\text{nonoperating liabilities}\\ &NA = \text{nonoperating assets} \end{aligned}$​SOTP=N1​+N2​+…+ND−NL+NAwhere:N1​=Value of first segmentN2​=Value of second segmentND=net debtNL=nonoperating liabilities​

How to Calculate Su🥂m-of-thཧe-Parts Valuation – SOTP

The value of each business unit or segment is derived separately and can be determined by any number of analysis methods. For example, 澳洲幸运5开奖号码历史查询:discounted cash flow (DCF) valuations, asset-based valuations and multiples valuations using revenue, operating profit or 澳洲幸运5开奖号码历史查询:profit margins are methods utilized to value a business 🗹segment.

What Does the SOTP Tell You?

Sum-of-the-parts valuation, also known as 澳洲幸运5开奖号码历史查询:breakup value analysis, helps a company understand its true value. For example, you might hear that a young technology company is "worth more than the sum of its parts," meaning ♕the value of the company's divisions could beღ worth more if they were sold to other companies.

In situations such as this one, larger companies have the ability to take advantage of synergies and 澳洲幸运5开奖号码历史查询:economies of scale unavailable to smaller companies, enabling them to maximize a division's profitability and unlock unrealized va⛦lue.

The SOTP valuation is most commonly used to value a company comprised of business units in different industries since valuation methods differ across industries depending on the nature of revenue. It is possible to use this valuation to defend against a hostile takeover by proving the company is worth more as a sum of its parts. It is also possible to use this valuation in situations where a company is being revalued after a 澳洲幸运5开奖号码历史查询:restructuring.

Example of How to Use the Sum-of-the-Parts Valuation –ꦜ SOTP

Consider United Technologies (NYSE: UTX), which said it will break the company into three units in late 2018—an aerospace, elevator and building systems company. Using the 10-year median enterprise value-to-EBIT (EV/EBIT) multiple for peers and 2019 operating profit projections, the aerospace business is valued at $107 billion, the elevator business at $36 billion and building systems business $52 billion. Thus, the total value is $194 billion. Lessing out net debt and other items of $39 billion, the sum-of-the-parts val🔜uation is $155 billion.

The Difference B♒etween the ﷺSOTP and Discounted Cash Flow – DCF

While both are valuation tools, the SOTP valuation can incorporate a discounted cash flow (DCF) valuation. That is, valuing a segment of a company may be done with a DCF analysis. Meanwhile, the DCF uses discounted future cash flows to value a business, project or segment. The present value of expected future cash flows is discounted using a 澳洲幸运5开奖号码历史查询:discount rate.

Limitations of Using Sum-of-the-Parts Valuation – 🙈♓SOTP

The sum-of-the-parts (SOTP) valuation involves valuing various business segments, and more valuations come with more inputs. As well, SOTP valuat♕ions do not take inꦐto account tax implications, notably the implications involved in a spinoff.

Learn More About the SOTP Valuation

For help on choosing the right valuation tool check out 澳洲幸运5开奖号码历史查询:this guide to picking the right꧅ valuation method.