We've seen how to do sum-of-the-parts analysis, but what does it mean for
us corporate strategists?
Just a recap, in our sum-of-the-parts analysis,
we concluded that the equity value per share was 10 where as the price for
which the share was currently trading was only 9.
If you are a financial analyst, let's say you're working for Barclay's which
is actually right over there, you can look at these calculations as follows.
You can say actually the share price is cheap.
We calculated that it should be worth 10, but the actual price is only 9.
So in other words, you could say the share is undervalued.
Now if through our calculations we conclude that the share is very
undervalued, you might be willing to trade on that.
You could say I'm going to buy the share with the expectation or
hope that the share price will go up in the future.
But what about us, corporate strategies, what can we learn?
Can we learn anything about corporate advantage?
Here is the fundamentals of the sum-of-the-parts.
We calculated an Enterprise Value.
For each business of a multi-business firm,
we use multiples of single business peers,
that is enterprise value over earnings multiples.
Then we took the actual earnings of our own business and
multiply this to get enterprise value.
We repeated these steps for each of our businesses.
The sum of the businesses, that is the sum-of-the-parts,
then gives an enterprise value for the entire multi-business firm.
The formula shows a brief summary of this approach.
It comes down to a multiplication between our actual earnings of
the multibusiness firm, and multiples of single business peers.
Corporate advantage is when businesses owned together are worth
more than the businesses owned separately.
Thus we could say that corporate advantage compares the businesses when
part of a multi-business firm versus when they are single businesses instead.
This seems closely related to the comparison of a sum-of-the-parts analysis.
Can a sum-of-the-parts analysis tell something about corporate advantage?
No and yes. No, because earnings are taken as fixed.
It's the actual earnings of the businesses when owned jointly.
We take that as an input to our calculations.
From the calculations,
we can never infer what earnings would be like if owned separately.
Thus, a sum-of-the-parts analysis can not tell us what
our businesses would be worth if owned separately.
However, a sum-of-the-parts analysis can tell you whether the market values,
a given level of earnings, differently for
your multi-business firm than for comparable single business firms.