Sum-of-the-parts valuation

Some companies are really several different businesses wearing one ticker. A sum-of-the-parts (SOTP) valuation values each segment separately, with the multiple appropriate to that business, then adds them up.

When to use it

A conglomerate might own a software arm (which the market values at a rich multiple), a slow industrial arm (a modest multiple), and a stake in a listed subsidiary (worth its market price). Applying one blended multiple to the whole group misvalues every part.

A worked example

A holding company has three segments. We value each on the multiple fitting its industry:

Software arm:   EBITDA  80  x 15  = 1,200
Industrial arm: EBITDA 120  x  6  =   720
Listed stake:   market value      =   400
--------------------------------------------
Gross asset value                 = 2,320
- Net debt at holding level       -   300
= Equity value                    = 2,020

Across 100 shares, that is 20.20 per share.

Why it matters

• It reveals hidden value — a great segment can be masked by being lumped in with weaker ones.
• It is the basis of the conglomerate discount: groups often trade below the sum of their parts because the market dislikes complexity. That gap is exactly what activist investors target by pushing for a spin-off.

SOTP is more work than a single multiple, but for diversified companies it is the only way to get the valuation right.