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Most people think of the Lowry Company as an unrelated diversifier

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Most people think of the Lowry Company as an unrelated diversifier. Suppose that the Lowry Company's total market capitalization equals $8 billion. The company has three divisions.   Division #1 has a total net income of $150 million, and its competitors have an average P/E multiple of 15. Division #2 has a total net income of $250 million, and its competitors have an average P/E multiple of 18.   An investment banking analyst has argued that the sum of the parts exceeds the value of the whole by 12.5%.  

A) What must the analyst believe that Division #3 is worth?

B) Suppose that the Lowry Company CEO argues that the firm is not an unrelated diversifier. She argues that the firm generates substantial economies of scope.   According to her, those economies show up almost entirely in higher earnings for Division #2 than would otherwise be the case if it was a stand-alone entity.   Consequently, she explains that a break-up of the firm would only yield a sum-of-parts value of $7.5 billion.   How much less is she assuming that Division #2 would earn in net income if it were a stand-alone entity?

C) The Lowry Company CEO also argues that the firm should not be broken up because it is headquartered, and largely operates, in an emerging market. Why might she be right that the location of the firm perhaps justifies its diversification strategy?