What Is Breakup Value?

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

Key Takeaways

  • Breakup value is an analysis of the worth of each of a large corporation's distinct lines of business.
  • If the breakup value is greater than its market capitalization, investors may press for a spinoff of one or more divisions.
  • Investors would be rewarded with stock in the newly-formed companies, or cash, or both.

If a major corporation 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 stocks 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.

Breakup value is also an indicator of the intrinsic value of a corporation, the sum of its parts.

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, relative valuations, based on publicly-traded industry peers, can be used to establish a value for the segment.

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 relative valuation, which measures the performance of each segment against its industry peers. Using 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 flow, analysts evaluate how the business segment is performing compared to its peers.

Analysts may also use an intrinsic valuation model such as discounted cash flows or a DCF model. In this scenario, analysts use the business segment’s future free cash 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 market capitalization, a straightforward calculation of in which a company’s share price is multiplied by its total number of shares outstanding. I

The times revenue method relies on a stream of revenues generated over 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.