Techniques used to value an M&A deal: sum-of-the-parts analysis (SOTP)
Another method used to value an M&A deal is Sum-of-the-Parts Analysis (SOTP).
This method is a form of discounted cash flow (DCF) valuation that is based on the principle that the value of a business is equal to the sum of the fair market values of its assets and liabilities.
SOTP analysis in M&A deals allows buyers to understand the value of each part of the target company, which can help them negotiate a fair price for the acquisition. It can also be used by sellers to showcase the value of their company's business units or assets, which can help them attract potential buyers.
The first step in the SOTP analysis is to identify and determine the value of each component of the company. These can include assets like property, equipment, and intellectual property, as well as liabilities such as debt, tax obligations, and other contractual obligations.
Once the value of each component has been determined, the total value of the company can be calculated by summing the values of all the parts. This sum can then be discounted to account for the time value of money and to reflect the fact that the total value of the company may not be realized in a single transaction.
By applying the SOTP analysis in M&A deals, companies can effectively communicate the value of their business units to potential buyers or investors, ultimately leading to more successful transactions.