Aerospace parts
Segment EBITDA $300 million, peers at 12x.
- Value
- $3,600 million
Sum of the parts valuation, segment by segment
A sum of the parts (SOTP) valuation values each business of a company on its own, usually at the multiple its own peers trade at, adds them up, takes off corporate costs, net debt and anything owned by outsiders, then adds stakes and assets no segment holds. In the first example below three segments worth $5,800 million together give $40.13 a share against a $34.00 stock price, a 15.3% discount. Soreno, an AI voice interview practice app for consulting, investment banking and other finance candidates, runs a free enterprise value calculator with no sign-up, and mock technical interviews where an AI interviewer asks how you would value a conglomerate.
Updated
- One multiple per business. Each segment is valued against its own peers, not the group's.
- Then the parent's own lines. Corporate costs, net debt, outside owners, stakes in other companies.
- Compare with the share price. The gap is the conglomerate discount, or a sign your multiples are high.
- Breakups have costs. Tax on a sale and standalone costs on a spin-off come off the answer.
- Twelve questions below. Short answers in our words and the follow-ups to expect.
Sum of the parts in three examples
Corran Industries and every number here are invented by Soreno for practice, in millions of dollars. Corran has three segments, $40 million a year of corporate costs no segment carries, $1,400 million of net debt, 100 million diluted shares and a share price of $34.00. Each segment's multiple is the median EV/EBITDA of its own listed peers, which we give rather than build.
Building products
Segment EBITDA $200 million, peers at 8x.
- Value
- $1,600 million
Distribution
Segment EBITDA $100 million, peers at 6x.
- Value
- $600 million
Example 1: three segments to a share price$40.13 a share
1. Value each segment
$5,800 million
Aerospace parts: $300 million × 12x = $3,600 million. Building products: $200 million × 8x = $1,600 million. Distribution: $100 million × 6x = $600 million. Together $5,800 million.
2. Corporate costs
Less $386.7 million
The $40 million a year of head office cost is real and ongoing, so it gets valued too. Our convention: capitalize it at the blended multiple, $5,800 million ÷ $600 million of segment EBITDA = 9.667x. $40 million × 9.667x = $386.7 million.
3. Enterprise value
$5,413.3 million
$5,800 million − $386.7 million = $5,413.3 million.
4. Equity per share
$40.13
Less $1,400 million of net debt: $4,013.3 million. Divided by 100 million shares: $40.13.
5. Read it
15.3% below the parts
The stock is $34.00, so it trades 15.3% below the sum of its parts. Say what could explain it before calling it cheap: the multiples may be generous, corporate costs may be understated, or investors may doubt that a breakup will ever happen.
Example 2: outside owners, a stake and a finance arm$42.93 a share
Three facts from Corran's notes. It owns 80% of Building products, which it consolidates, so segment EBITDA includes all of it. It owns 30% of a listed affiliate worth $1,000 million in the market, which it doesn't consolidate, so none of the affiliate's EBITDA is in any segment. And it has a small finance arm that lends to its dealers, left out of segment EBITDA, with $250 million of book equity. Lenders are often valued on book equity, and we use 1.2x book for this one. The $1,400 million of net debt excludes the finance arm's own borrowing, which funds its loans.
1. Start from the parts
Enterprise value $5,413.3 million
Example 1's segments less corporate costs. Nothing changes there.
2. Outside owners
Less $320 million
Building products has no debt of its own, so its $1,600 million of enterprise value is also its equity value, and 20% of it belongs to outside owners: $320 million. Valuing that stake at our segment value, not its book amount, is our convention for a SOTP.
3. The affiliate
Plus $300 million
30% × $1,000 million = $300 million. It's added because nothing above counts it.
4. The finance arm
Plus $300 million
$250 million × 1.2x = $300 million. This is an equity value, so it is added after net debt is taken off, never multiplied by an EV/EBITDA.
5. Per share
$42.93
$5,413.3 million − $320 million + $300 million + $300 million − $1,400 million = $4,293.3 million, or $42.93 a share. The $34.00 stock price is 20.8% below it.
Example 3: sell a division or spin one off?Break-even sale price $693 million
An activist wants Corran to sell Distribution or spin off Aerospace. A buyer offers $650 million cash for Distribution, whose tax basis is $250 million. Corporations pay federal tax at 21% and we ignore state tax, our simplification. A spun-off Aerospace would need $15 million a year of its own board, audit and listing costs, while Corran's head office costs stay the same. We assume the spin-off is tax free, which in the US turns on meeting the requirements of section 355, a question for tax lawyers. Start from example 2's $42.93.
1. Tax on the sale
$84 million of tax
Gain $650 million − $250 million = $400 million. Tax at 21%: $84 million. Cash after tax: $566 million.
2. Against keeping it
$34 million worse off
Kept, Distribution is worth $600 million in our SOTP. Sold, Corran gets $566 million of cash. Corran is $34 million worse off, so $42.93 becomes $42.59. A price above the segment's $600 million value still loses value once tax is paid.
3. Break-even price
$693 million
Solve price − 0.21 × (price − 250) = 600: price = (600 − 0.21 × 250) ÷ (1 − 0.21) = $693 million. Below that, selling makes Corran's holders worse off on our numbers.
4. The spin-off's cost
$1.80 a share
$15 million a year, capitalized at Aerospace's 12x by our convention, is $180 million of value, $1.80 a share, so the parts are worth $41.13 after the spin.
5. Recommend
Spin only if the gap closes
The stock sits $8.93 below the parts. A spin-off helps holders only if the market closes more of that gap than the $1.80 it costs. Selling Distribution needs a bid above $693 million. Say both conditions out loud, then which you think is likelier and why.
From FASB: ASU 2023-07, Segment Reporting, SEC staff: non-GAAP financial measures interpretations, IFRS Foundation: IFRS 8 Operating Segments, IRS Publication 542, Corporations and IRS: Revenue Ruling 2003-79 (section 355).
What the interviewer checks on a SOTP
In our experience it comes up as a twist: how would you value a company with very different businesses? The credit goes to the bridge, not the multiplication.
Why the method fits
Businesses that grow, earn and trade at different multiples. One group multiple would blur them.
Where the segment numbers come from
The segment note in the 10-K, which reports the profit measure the chief operating decision maker uses. It may not be EBITDA, so say how you would get there.
The parent's own lines
Corporate costs, net debt, noncontrolling interest, unconsolidated stakes and any finance arm, each added or taken off once.
What the gap means
A discount to the parts is a fact. Whether it closes depends on a catalyst, and a breakup carries tax and standalone costs.
12 sum of the parts interview questions
The short answers are ours. The notes say what a strong answer adds.
The method4 questions
Walk me through a sum of the parts valuation.
Show follow-ups
Short answer. Split the company into its segments, value each at its own peers' multiple, and add them up. Take off capitalized corporate costs, net debt and noncontrolling interest, add stakes no segment counts, and divide by diluted shares.
Says when you would use it: a company whose businesses would trade at clearly different multiples.
- “Where do you get segment EBITDA?”
- “What do you do with head office costs?”
How do you treat corporate overhead in a SOTP?
Show follow-ups
Short answer. Value it as a negative segment: the yearly cost times a multiple, often the blended one. Leaving it out overstates the parts.
Mentions that some of it might go away in a breakup, and some would be duplicated.
How would you value a company?
Show follow-ups
Short answer. With comps, precedent transactions and a DCF, and a SOTP when its businesses differ. Then compare the ranges.
Picks the method that matters most for this kind of company and says why. Practice it, see a model answer
What multiples would you use for a bank, a REIT and a software company?
Show follow-ups
Short answer. Book value or earnings for a bank, funds from operations for a REIT, revenue or EBITDA for software. In a SOTP, a finance arm is valued like the bank.
Ties it to example 2's finance arm, added as equity value. Practice it, see a model answer
The bridge4 questions
Why do you add noncontrolling interest to enterprise value?
Show follow-ups
Short answer. Because consolidated EBITDA includes 100% of a subsidiary even when outsiders own part of it. In a SOTP you take the outsiders' share of that segment's value off instead.
Works the 20% of Building products from example 2. Practice it, see a model answer
How do you account for a 30% stake in another company?
Show follow-ups
Short answer. Our question page covers the accounting. For a SOTP the point is that an unconsolidated stake brings none of its revenue or EBITDA into the company's numbers, so you add the stake's value separately.
Says what value to use: the market value if listed, otherwise its own multiple. Practice it, see a model answer
What is the difference between enterprise value and equity value?
Show follow-ups
Short answer. Enterprise value is the business for all capital providers. Equity value is what shareholders own: enterprise value less net debt, preferred and noncontrolling interest.
Explains why a finance arm's value joins at the equity line. Practice it, see a model answer
Where do segment numbers come from, and can you just add them up?
Show follow-ups
Short answer. From the segment note, which reports the profit measure management uses for each segment. Totaling them outside that note's reconciliation is, in the SEC staff's view, a non-GAAP measure, so reconcile to the consolidated numbers.
Mentions intercompany sales, which disappear in consolidation.
Breakups4 questions
What is a conglomerate discount?
Show follow-ups
Short answer. When a company's market value is below the sum of what its parts would be worth on their own. Reasons include harder analysis, capital moving between businesses, and corporate costs.
Treats it as something to explain, not proof the stock is cheap.
Would you sell a division or spin it off?
Show follow-ups
Short answer. A sale brings cash but corporate tax on any gain. A qualifying spin-off avoids that tax but adds standalone costs and gives no cash. Compare both with keeping it, per share.
Works a break-even sale price like example 3's.
Which valuation method usually gives the highest value?
Show follow-ups
Short answer. Usually precedent transactions, because they include control premiums. A SOTP can come out high too, if each segment gets its best peers' multiple.
Warns that picking the richest peer set for each segment inflates a SOTP. Practice it, see a model answer
How would you show a SOTP next to other methods?
Show follow-ups
Short answer. As its own bar on a football field chart, often with a low and a high case for each segment's multiple.
Says which segment's multiple moves the answer most. Practice it, see a model answer
More to prepare with
Common sum of the parts mistakes
Forgetting corporate costs
In example 1 they are worth $386.7 million, $3.87 a share.
Counting a stake twice
If a business is consolidated, its EBITDA is already in a segment. Only unconsolidated stakes get added on.
Leaving outside owners in
A segment the company owns 80% of is worth 80% to its shareholders.
Multiplying a finance arm's EBITDA
Its debt is its raw material. Value it on book equity or earnings and add it as equity value.
Breakup value with no tax
In example 3, $84 million of tax turns a sale above the segment's value into a loss of value.
Each segment's richest peers
Pick peers by business, then use the median, or the SOTP comes out high by construction.
Value a conglomerate out loud
Soreno's AI interviewer asks how you would value a company with three very different businesses, then pushes on corporate costs, stakes and breakup tax. You get a scored report on your answer.
Questions people ask
What is a sum of the parts valuation?
A way to value a company with several distinct businesses by valuing each one on its own and adding them up, then adjusting for corporate costs, debt, outside owners and stakes.
When should you use a SOTP?
When a company's businesses would trade at clearly different multiples on their own, such as an industrial group with an aerospace arm and a distributor, or a company with a finance arm.
Where do I find segment EBITDA?
In the segment note of the annual report. Since ASU 2023-07, US public companies also disclose significant segment expenses regularly given to the chief operating decision maker. The segment profit measure may not be EBITDA, so you may need to add back segment depreciation yourself.
Is total segment profit a GAAP number?
Only inside the segment footnote's reconciliation. The SEC staff says a total of segment profit shown anywhere else is a non-GAAP measure.
Do IFRS companies report segments too?
Yes. IFRS 8 requires companies with publicly traded debt or equity to report information about their operating segments in annual and interim reports.
What tax applies when a company sells a division?
In the US, federal corporate tax on the gain at 21%, plus any state tax. A spin-off is different: an IRS revenue ruling from 2003 sums up section 355 as letting a corporation, if certain requirements are met, distribute a controlled company's stock to its shareholders without the shareholders recognizing gain or loss.
Can a SOTP be done with a DCF for each segment?
Yes, if you have segment cash flows. Most interview answers use multiples, since segment capex and working capital are rarely reported in full.