A valuation method that values each business unit or asset of a conglomerate separately, then adds the components — useful when the whole trades at a discount to its parts.
Deeper Explanation
Sum-of-the-parts (SOTP) valuation is most applicable to diversified conglomerates, holding companies, and businesses with distinct, separately valued divisions. It reveals the "conglomerate discount" — the premium demanded by investors for the complexity and lack of focus in a diversified entity. When the SOTP valuation significantly exceeds the market capitalisation, one of three outcomes typically follows: management sells or spins off assets to realise value, an activist investor arrives to force the issue, or the market eventually re-rates as the market recognises the hidden value. Graham used SOTP analysis extensively for asset-heavy companies where each division had different earnings multiples.
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