Sum of the Parts Valuation (SOTP)

SOTP is appropriate when a company has multiple segments operating in different industries with different growth profiles, margins, and risk. Examples include conglomerates (GE, Berkshire), diversified industrials, media companies with streaming and legacy segments, and tech companies with cloud and hardware divisions. Using a single blended multiple would undervalue high-growth segments and overvalue low-growth ones.

For each segment: (1) identify the appropriate metric (EBITDA, revenue, subscribers), (2) select comparable pure-play companies, (3) apply the relevant multiple. Sum all segment values to get total enterprise value. Subtract net debt and other claims to get equity value. In a pitch book, SOTP is often presented alongside DCF and comps as a valuation cross-check.

Conglomerates often trade at a 10–20% discount to the sum of their parts — the 'conglomerate discount.' This discount arises from complexity, capital misallocation across segments, and lack of management focus. Activist investors often argue for spin-offs or divestitures to 'unlock' this value by allowing each business to trade at its standalone multiple.