Thursday, August 8, 2013

When the Whole is Worth Less Than the Sum of Its Parts

A long time ago, at a university that I won't name,  I attended a faculty meeting where each department head gave a report on their department.  The leaders of each of the five departments (e.g. marketing, accounting, etc.) stood up and demonstrated how their group was, by some convenient statistic, ranked among the top ten departments of the country.  A colleague pointed out that 'It is interesting that each and every department believes it is in the top ten but the U.S. News rankings put the college 27th!' 

Now in the case of the university, the disparity was obviously the result of selective reporting, but the same thing happens in business.  Sometimes the whole is worth less than the sum of its parts!  Joe wrote about this in a previous post The Power of Subtraction.  This week's Wall Street Journal gives two additional examples:

First, Consider Amazon's Jeff Bezos buying the Washington Post.  In an interesting WSJ post, (After the Sale: Unfolding the Washington Post's Inner Value) Miriam Gottfried notes the various parts of the Post enterprise.  The Post was sold for $250 million whereas the entire Post enterprise is valued at $4 billion consisting of TV Broadcasting, Cable TV and Education in addition to Newspaper Publishing.  The article goes on to note the different trading multiples typical of the various business sectors and suggests that continuing to focus the Post (perhaps by spinning off the educational arm, Kaplan) might 'release further value'.  I agree, not because of PE magic (which we'll warn about in a subsequent post)  but because of substantial evidence the companies increase value by focusing  on the core units with the best chance for a sustainable, competitive advantage. 

And speaking of spinoffs, note that TripAdvisor, spun off from Expedia in December 2011 now exceeds the parent in terms of Market Cap.  (See Out of Nest, TripAdvisor Soars Past Expedia).  

All the best,


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