Sum-of-the-Parts Valuation

A Sum-of-the-Parts Analysis (SOTP) componentises a company by division, values each segment and adds the discrete valuations to arrive at an enterprise value. SOTP analysis can be done most easily for companies with separate operating divisions (particularly where financial reporting is segmented by division). If not, lack of financial disclosure may render SOTP difficult to achieve. Analysts conduct SOTP analysis to determine a company’s break-up value or to value divisions ahead of spin-offs or carve-outs. SOTP analysis is useful to company management, potential bidders, or activist shareholders seeking structural change if the parts are worth more than the whole.