What Is Breakup Value?

The breakup value of a corporation is the worth of eachꦿ of its main business segments if they were spun off from the parent company. It is also called the sum-o🌊f-parts value.

If a major corpor☂ation has a market capitalization that is less ♏than its breakup value for a prolonged period of time, major investors may press for the company to be split apart in order to maximize shareholder profits.

Understanding Breakup Value

Breakup value is applicable to large-cap s🐼tocks that operate in several distinct markets or industries.

If a company's stock has not kept up with the perceived level of its full value, investors may call for the company to be split apart, with proceeds returned to investors as cash, new shares in the spinoff companies, or a combination of both.

Investors also may calculate breakup value on a perfectly healthy company as a way to determine a potential floor for its stock price or a potential entry point for a prospective stock buyer.

To accurately calculate a company's breakup value, data is needed on each distinct operating unit's revenue, earnings, and cash flows. From there, 澳洲幸运5官方开奖结果体彩网:relative valuations, based on publicly-traded industry peers, can be used to establish a value for the seg꧙ment.

Breakup Value and Business Valuation

The end result is a breakup value analysis for each business segment of the corporation. One way to do this is by 澳洲幸运5官方开奖结果体彩网:relative valuation, which measures the performance of each segment against its industry peers. Using 澳洲幸运5官方开奖结果体彩网:multiples such as price-to-earnings (P/E), forward P/E, price-to-sales (P/S), price-to-book (P/B), and price to free cash flo𝓀w, analysts evaluate how the bus♚iness segment is performing compared to its peers.

Analysts may also use an intrinsic valuation model such as discounted cash flows or a 澳洲幸运5官方开奖结果体彩网:DCF model. In this scenario, analysts use the business segment’s future free ca🎉sh flow projections and discounts them, using a required annual rate♊, to arrive at a present value estimate.

A DCF is calculated as:

DCF = [CF1 / (1+r)1] + [CF2 / (1+r)2] + ... + [CFn / (1+r)n]

CF = Cash Flow

r = discount rate (WACC)

Other Valuation Methods

Other business valuation methods include 澳洲幸运5官方开奖结果体彩网:market capitalization, a straightforward calculation of in which a company’s share price is multiplied by its total number of 澳洲幸运5官方开奖结果体彩网:shares outstanding. I

Tওhe times revenue method relies on a stream of revenues generated ov👍er a period of time, to which an analyst applies a specific multiplier, derived from the industry and economic environment. For example, a tech company in a high growth industry may be valued at 3x revenue, while a less hyped service firm may be valued at 0.5x revenue.