What is Breakup Value?

Breakup value is the market value of a business if its business units were to be sold off and operated independently. If the breakup value of a firm is greater than its current market value as a single entity, it can make sense to sell off pieces of the firm in order to increase the realized value for shareholders. In these situations, the money gained from an asset sale is given to shareholders as a special dividend. Another option is to spin off an operating division and distribute shares in the new business to existing shareholders. An acquirer can run the same calculation to see if it is worthwhile to buy a target company and then break it up.

An investor can calculate the breakup value for a public company to see if its shares are trading below the breakup value. If so, the stock may be undervalued and could appreciate over the long term.

Disadvantages of Breakup Value

There are several reasons to be cautious about using the breakup value figure, which are as follows:

Not actual market values. Someone thinking about breaking up a business in order to increase its value should be cautious about accepting the breakup values derived for each part of the business. It is entirely possible that these estimates do not reflect the actual market values that will be obtained.
Loss of synergies. A breakup will result in the loss of any synergies that already existed from having the entire business operate as a single unit. For example, the accounting department of the corporate parent might need to be duplicated in each of the subsidiaries to be spun off. Also, any sharing of best practices across the organization would no longer occur.