What's a sum-of-the-parts valuation and when do you use it?

Sum-of-the-parts — SOTP — values a multi-business-line company by valuing each segment independently using the methodology most appropriate to that segment, then summing the segment EVs and bridging to equity value.

The mechanic: split the company by reportable segment or business line. For each segment, identify the right peer set — pure-play public comparables in that specific industry — and apply the appropriate multiple to that segment's metric. EV/EBITDA for a stable industrial segment, EV/Revenue for a growth tech segment, P/E for a financial services arm. Some segments may warrant a DCF if they have idiosyncratic cash flow profiles. Sum the segment EVs to get total enterprise value. Then bridge to equity: subtract corporate-level debt, add corporate cash, subtract minority interests, add associates, and subtract corporate overhead capitalized at an appropriate multiple.

When to use it: any time the consolidated multiple doesn't reflect the underlying mix. The classic example is a conglomerate — a company with a slow-growth industrial business, a fast-growth software business, and a financial services arm, all under one ticker. The market often applies a "conglomerate discount" because investors don't get the pure exposure they want. SOTP shows what each segment would be worth if separately owned, which is the implicit benchmark for activist or breakup arguments.

Other use cases: spin-off analysis (what's RemainCo worth versus SpinCo), restructurings, bankruptcy waterfalls where you're valuing assets to determine recoveries by claim class, and sale-side advisory for any business with separable units.

Key pitfalls. One: stranded costs — corporate overhead that doesn't go away if you sell a piece. Two: tax leakage on a separation, which can be 20-30% of the headline value. Three: dyssynergies — operational overlap between segments that means the combined entity is worth more than the parts in some cases (rare, but real). Four: customer or vendor relationships that span segments and would be disrupted in a breakup. A clean SOTP always shows a "discount to SOTP" line and articulates which of these factors explains it.