WHAT IS SUM-OF-THE-PARTS (SOTP) VALUATION?
Sum-of-the-Parts is a valuation method used when a company operates in multiple distinct business units that have different valuation drivers or industry peers.
WHAT IS SUM-OF-THE-PARTS (SOTP) VALUATION?
Sum-of-the-Parts is a valuation method used when a company operates in multiple distinct business units that have different valuation drivers or industry peers. Rather than valuing the entire business with a single multiple, SOTP values each segment individually, then sums them to get the Enterprise Value of the firm.
Use Case: Conglomerates (e.g., GE, Amazon, 3M), holding companies (e.g., Berkshire Hathaway), or any diversified firm with divisions in different sectors or risk profiles.
WHEN IS IT USED IN INVESTMENT BANKING?
In investment banking, SOTP is used:
In pitch books to argue for a higher valuation
During strategic alternatives analysis (e.g., spin-offs, divestitures)
In activist defense or break-up value assessments
To benchmark undervalued conglomerates against pure-play peers
It supports arguments like:
“Your industrials segment is being undervalued due to your exposure to legacy print—let’s spin it off and unlock value.”
SOTP MODEL STRUCTURE
Let’s walk through a detailed model you might build as an analyst.
Step 1: Identify Business Segments
Example: Company XYZ has 3 divisions:
Cloud Services
Advertising
Logistics
Each has different peers and margin profiles.
Step 2: Gather Key Metrics
You need the following for each segment:
Revenue
EBITDA (or EBIT, depending on approach)
Growth rate
Margin
Public comparable multiples (EV/EBITDA, EV/Sales, etc.)
Step 3: Apply Appropriate Multiples
You source trading comps for each segment and use relevant metrics. Example:
SegmentMetricEBITDAMultiple (EV/EBITDA)Enterprise ValueCloud ServicesEBITDA$800M15x$12,000MAdvertisingEBITDA$500M10x$5,000MLogisticsEBITDA$400M6x$2,400M
You now have segment-level Enterprise Values.
Step 4: Add Segment Enterprise Values
Total Enterprise Value = $12B + $5B + $2.4B = $19.4B
Step 5: Adjust for Corporate Items
ItemValueSegment EV (sum)$19,400M+ Cash$1,200M– Debt($5,000M)– Minority Interest($300M)– Unallocated Corporate Expenses (PV)($800M)
Equity Value = $19,400M + $1,200M – $5,000M – $300M – $800M = $14.5B
Step 6: Divide by Shares Outstanding
If shares outstanding = 500M:
Implied Share Price = $14.5B ÷ 500M = $29.00/share
KEY ASSUMPTIONS AND RISKS
Picking the right multiple is critical—use peers that truly match the business unit.
Corporate overhead must be accounted for, or you'll overstate equity value.
Intersegment dependencies may be overlooked—synergies may vanish in break-ups.
SOTP can overestimate value if segments can’t be truly separated or monetized.
BONUS: HOW BANKERS USE IT IN A PITCHBOOK
Create a SOTP page showing current market valuation vs. implied SOTP value.
Argue for a re-rating opportunity (e.g., “Your logistics business is hiding the true value of your high-growth cloud arm.”)
Propose a spin-off or carve-out to “unlock value.”
Show sum-of-parts premiums vs. current trading multiples.
TIPS FOR INTERVIEWS
If asked to walk through a SOTP model:
Start with segments and EBITDA
Show multiple selection logic
Adjust for debt, cash, and corporate costs
Arrive at equity value and share price
Always mention context: why SOTP is being used instead of comps/DCF