What is a Breakup Value?

Malcolm Tatum
Malcolm Tatum

Also known as the private market value (PMV), the breakup value has to do with the assets that are owned by a company. Essentially, the breakup value is calculated by determining the resale value of each of the departments or divisions of each company, along with the assets of land, buildings, equipment, and cash in hand that are assigned to each division. Breakup values are especially helpful when a group of investors is considering the acquisition of a particular corporation.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

A high breakup value is an indicator of the presence of a credible amount of assets. The assets may be held by both a parent organization and a series of subsidiaries, or be distributed among various locations or divisions that operate under the same company name. The task of determining the breakup value is made easier when each of the divisions or subsidiaries operate with their own stock price.

Investors who wish to find bargains will often investigate the breakup value of a company before choosing to make an offer. In many cases, the investor or group of investors is not interested in actually breaking up the company, although some divisions or assets may be sold off as part of a corporate restructure after the acquisition takes place. However, a company that has a relatively high breakup value can be considered a good investment, even if the company is going through a temporary downturn in sales. The presence of enough assets to result in a solid breakup value ensure that the investors will be able to recoup the investment if the company cannot be salvaged, so the level of risk is kept at a minimal level.

Corporate raiders also look closely at the value of a company, often with an eye of dismantling the company and selling off the assets. To this end, the PMV is very important. Calculating the breakup value of targets helps the corporate raider to focus on companies that are sure to generate a nice profit after the acquisition and the selling off of the various assets and holdings.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Could you please describe how the assets and liabilities will be distributed over a demerged and a new companies. If company "AB" demerges into "A" and "B", what does company "B" receive, and what remains to "A"? What happens to all the Owners Equity?

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