Q: A multi-product company\'s breakup value equals the cash one could realize by
ID: 2647199 • Letter: Q
Question
Q: A multi-product company's breakup value equals the cash one could realize by splitting the company into two or more independent firm's and disposing of each separately. A company becomes a candidate for a takeover when its market value fall below its breakup value.
a. How might breaking up a company and selling the parts create value?
b. If the sum of the free cash flows of the enterprises created by breakup equals the cash flow of the company prior to breakup, might breakup still create value? If so, how?
Explanation / Answer
Answer:
a. Breaking up a company is done to separate low performing and good performing units. Breaking up results in a new good performing unit that creates the value individually.
b. Yes even if the sum of the free cash flows of the enterprises created by breakup equals the cash flow of the company prior to breakup , breakup may still create value because of the substantial growth opportunities of new units.
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