please explain, page-2

This may help many understand market cap verses breakup value simple rabbit...its good to be simple and ask these questions as many of us are learning as well and paying a sad tragic price for a company that abuse its shareholders and culture...then you should all go back to read the reality of the situation in the posts in HC...i will be donating some funds back to HC & world vision & few others when i recoup my massive losses!nothing wrong with addressing these issues of abuse and in the long term it only makes the company more honest...If IM chanelling 20 mill to consultants ...thats evil, thats our money ...!!!!!!
She is a previous consultant on $143,000 a year approx


Use Breakup Value To Find Undervalued Companies


February 26 2009| Filed Under » Carl Icahn, Divestiture, M&A, Spinoff, Value Investing



By the time we hear the term "breakup value" mentioned about a company, things tend to be going pretty badly. It's often brought up as a throw-in-the-towel response to poor performance, either by the company itself or simply in the price of the stock. However, the theories behind breakup value can be used to evaluate certain types of companies, regardless of their financial health. Any good stock analyst or fund manager will calculate a breakup value for any company that warrants it - namely, any publicly-traded company that operates in more than one distinct business and derives its value from multiple sources. Read on to learn how to calculate and evaluate this valuation measure for yourself.

What Is It?
Most generally defined as a sum-of-parts value, breakup value tells us how much a company would be worth to shareholders if it were stripped down and sold off in pieces. In a true company breakup, the assets are sold, the outstanding debt is paid off with the proceeds and whatever is left is then returned to shareholders. The middle ground that investors most often see is that some business lines are sold for cash, while others are spun off into new companies. For any business divisions that are spun off, the investor will typically get shares in the new company as compensation, or possibly a blend of stock and cash. (For more insight, see Conglomerates: Cash Cows Or Corporate Chaos?)

Events That Cause a Discussion of Breakup Value
1.There is a liquidity crisis at the company: Even if only one division is running losses, the cash drain will affect the entire company and keep other divisions from getting the capital and attention they deserve. (For how to determine company liquidity, see The Working Capital Position.)

2.Management is seen as ineffective: Managing a company with distinct business units is not easy, and comes with increased scrutiny. (For related reading, see Evaluating A Company's Management.)

3.Businesses don't "mesh": There aren't sufficient operational synergies to justify the conglomerate structure.

4.One or more businesses are doing very well, while others lag behind: This could make a sale more likely as the company looks to capitalize on the increased attractiveness of the successful businesses.

5.Litigation concerns: For example, Altria decided to split off parts of the company to protect those divisions against litigation in the tobacco division. By splitting off Kraft foods, it allowed Kraft to survive and thrive on its own rather than be subject to the overhang of expensive tobacco settlements at Altria.

6.The stock price is not keeping up with business results: This is commonly referred to as the conglomerate discount.

7.The company has shown a willingness to sell off non-performing assets: This shows that management is committed to increasing shareholder value through whatever means are necessary.
When Breakup Value Will Not Apply
Many companies, especially those with smaller market capitalizations, tend to be narrowly focused in their business efforts. Companies at this stage are still fighting for market share and looking to establish leadership in the industry. Investors shouldn't expect these companies to branch out too far.

Using the Theories of Breakup Value
According to the efficient market hypothesis, the price of a stock should, in any given moment, reflect the sum of a business's parts. In reality, there are many instances in which a company will trade at a discount to its breakup value. In fact, it is not uncommon for a stock to trade at levels below the breakup value for extended periods of time. (For more on this topic, read What Is Market Efficiency and Working Through The Efficient Market Hypothesis.)

Take Stock of the Company as a Whole
The best place to begin a breakup value analysis is by looking at the parent company as a whole. Get a feel for the overall market capitalization, cash and debt levels, and the relative sizes and functions of the operating divisions. Does one division contribute the lion's share of revenue and earnings? Essentially, you'll want to look at each division as its own company. If its stock traded on an exchange, what price would it have? The larger a company is (in terms of market cap), the more likely it is that it will have stock spin-offs should a breakup or divestiture occur. Smaller companies will tend to have breakups involving liquidations or cash sales, because the size of the different businesses might not be large enough to trade on the exchanges.

Whenever possible, you should look at competing companies to see what kind of price/earnings valuation range you could expect if a business division were broken out. Take a look at the stock prices of companies that do similar things. You'll be able to see a pattern emerge in terms of valuation. From this point, you can comfortably apply an average valuation multiple to the business segment, provided that everything else at the company looks roughly equivalent.

To estimate earnings at the division, usually the best measure to use is operating earnings, as opposed to net earnings. Net earnings figures by operating division can be difficult to find because publicly available financial statements tend to only show consolidated results. Operating earnings get to the core of the business, which is the most important consideration at this point. In most cases, we can track down revenue, margins and contributions to income by looking at the company's quarterly earnings statements (available via the SEC Edgar website).

Cash and investments are liquid assets and should be counted as such. But investors are also seeing more cases of companies owning stock in a peer or partner as a by-product of past relationship-building activities. Be sure to look through the balance sheet carefully so that you can count the value of any of these assets that would be sold off in the event of a breakup.