24/7 Wall St. 2007 Break-Up Valuations

By Ryan Barnes. Edited by Douglas A. McIntyre

Over the next several days, 24/7 Wall St. will look at the break-up values of a number of large cap companies. Firms with market caps of over $100 billion have been kept off the list because they are likely to be too large for private equity buy-outs. But, the companies on this list may well end up as targets.

Below is the approach that we have taken to each company.

Breakup Value Methodology

1.                  Designated Operating Segments by the Company

a.       This is the most logical place to begin our study.  The larger a company becomes the more likely it is that management & shareholders come to think of it as drawn across certain lines, with identifiable business and products within them.  Also, this is our best chance to see revenue and operating income figures broken into the slices that we want; from here we can analyze each segment with a clear picture of the relative costs and benefits

b.      

KMB Kimberly-Clark (as an example)

has 4 operating segments as defined by the company.  Company filings provide us with segment revenue and operating income levels; we must make assumptions on the debt load coverage, and unless specified a pro-rata allocation will be used.

c.       Operating Profit is one of the best measurements we have when conducting a breakup value; net income, at the level that would make calculations ideal, is either a)not available or b)not applicable due to changes in tax structure, one-time events, and the like. 

2.                  Effective Tax Rate

a.       Good to know of any favorable tax treatment due to scale or geographic diversification within the company; these benefits would likely not exist for an operating division existing as a stand-alone company or as part of a different company.

3.                  Price/Sales, Price/Book

a.       These are solid benchmark ratios to use when comparing the valuation of a business with its peers; the less growth-oriented a business becomes, the more likely that these metrics will be valuable and the peer group will be in line with averages.  We will use other metrics such as P/E’s and PEGs when such data is consistent and reliable within the industry group.

4.                  Share Counts should always include fully diluted measures to account for stock or options grants, secondary offerings, etc.

5.                  Lastly, we can see how each operating unit contributes to the overall breakup value, along with notations on the valuation metric or pricing method used

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.