Sum Of the Parts Valuation
by Corporate Professionals on Jul 09, 2012
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Company A is doing Sugar Business with Value of Say Rs 100 and company B is doing Cement Business with Value of say again Rs. 100 then what should be the value of company C doing both the above ...
Company A is doing Sugar Business with Value of Say Rs 100 and company B is doing Cement Business with Value of say again Rs. 100 then what should be the value of company C doing both the above business by itself, On unitary basis it should be Rs 200 i.e. Value of C company = Value of A company + Value of B company
It seems so simple; however it is not the way how valuation actually happens in the real life scenarios. That’s where the role of a valuer becomes significantly important. A corporate valuer always focus on the risk involved while undertaking any SOTP valuation and gives appropriate discounts accordingly. In the transaction history and the empirical research carried by various researchers it being well laid that the market gives discount to the sum of parts value which is known as Diversification discount or portfolio discount or conglomerate discount.
In real life scenario there are companies which are engaged in diversified business, and each business has different product line, profit margin etc, so to value diversified companies on a consolidated level, like consolidated sales and consolidated profit may not able to give a true value of the company as some business segment may fetch a high comparable companies multiple and some low Multiple. Similarly the cash flow generating components of each Biz would also be different
What is Sum of the Parts Valuation?
It is the Value of a company by determining what its divisions would be worth if it was broken up and spun off or acquired by another company...
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