What is a sum-of-the-parts analysis? When do you use it?

Let me break it down simply:

Think of a conglomerate like a mixed box of Lego sets. A sum-of-the-parts analysis is like pricing each Lego set separately instead of valuing the whole box at one price. Sometimes the individual pieces are worth more than the whole.

Diverse businesses are perfect candidates. Imagine a company with a tech division, a manufacturing unit, and a real estate portfolio. Each might have a totally different value profile. Valuing them together masks their true worth.

Private equity loves this approach. They might see a conglomerate where one division could be sold or spun off at a premium. Like finding a rare collectible Lego set inside a mixed box of random pieces.

Struggling or underappreciated companies benefit most. The market might undervalue a complex business, but breaking it down reveals hidden gems. Each business unit gets valued at its most appropriate multiple.

Remember: Sum-of-the-parts analysis is about uncovering value the market might miss. It's like a treasure hunter who knows some pieces are more valuable when separated than when kept together.

Talk soon,

Sam