SOTP valuace
Sum-of-the-Parts · Valuation by Parts · Conglomerates & Banks
Valuing a company by breaking it into segments, valuing each using the method that fits its economics, summing the parts, then adjusting for holding-level items.
What it is
A conglomerate is a company that owns multiple independent businesses under one roof (e.g. Berkshire Hathaway — insurance, railways, consumer brands; Alphabet — search, cloud, autonomous vehicles). Conglomerates are the typical candidate for the method described below.
Sum-of-the-Parts (SOTP) values a company as the sum of the values of its parts, not as a single whole. It is used for conglomerates, holding companies, and diversified groups where a single multiple for the whole company makes no sense — each segment has different economics (growth, margins, risk, capital intensity).
Process:
- →Break the company into segments (from segment reporting).
- →Value each segment using the method appropriate to its nature:
- →Sum the segment values → gross value.
- →Adjust to equity value: subtract net debt, minority interests, holding (corporate) costs, and any conglomerate discount.
Core relationship:
Equity value = Σ segment values − net debt − minorities − holding costs − (conglomerate discount)
Banks and financial groups use the same logic, but with banking methods per segment:
- →retail/commercial bank → P/TBV (from ROTE/Ke/g) or excess return model
- →asset/wealth management → P/E or % of AUM
- →insurance → P/E or embedded value
Holding costs at banks are capitalized (annual cost / cap rate); instead of net debt, holdco net debt is addressed.
Why track it
SOTP reveals hidden value that the market misses when pricing the company as a whole — typically when one segment (e.g. cloud, asset management) "carries" the firm but is overshadowed by a slower core.
Watch for:
- →Conglomerate discount — the market often prices a holding below the sum of its parts (complexity, capital allocation, lower transparency). SOTP quantifies how large the discount is.
- →Catalysts — a spin-off or segment sale can unlock the discount.
- →Segment data quality — SOTP is only as good as the segment reporting.
Real-world example
Financial group (bank + asset management + insurance):
- →Retail bank: TBV $4bn × fair P/TBV 1.4× = $5.6bn
- →Asset management: AUM $120bn × 2% = $2.4bn
- →Insurance: net income $350m × P/E 11 = $3.85bn
- →Σ gross = $11.85bn
- →− holding costs (capitalized), − minorities, − holdco debt, − 10% discount
- →= equity value → fair price/share + implied group P/TBV
Compare the implied P/TBV against the current one — a large gap signals either undervaluation or overly optimistic segment assumptions.
Watch out for
SOTP is sensitive to the choice of multiples and discount — a small change in the multiple of a large segment moves the entire valuation. Always run a sensitivity analysis.
The conglomerate discount is not a constant: quality management with good capital allocation narrows it; a disparate holding without synergies widens it. Don't forget taxes on a potential segment sale, and that "hidden value" may never be realized if a catalyst is missing.