Explain valuing a firm as the sum of its parts and why conglomerates trade at a discount

Sum-of-the-parts valuation values each business segment on its own, often with the multiple or cash flow model suited to that segment, adds the segment values and then deducts net debt and other corporate claims to reach equity value. It suits diversified groups whose divisions differ in growth and risk. When the market values the group below the sum of its parts, the gap is a conglomerate discount. Proposed explanations include inefficient internal capital markets, where strong divisions subsidise weak ones. Two others are endogenous factors, where struggling firms diversify to escape trouble, and research measurement errors, where the discount reflects flawed comparisons. The discount is often cited to justify a spin-off, but the trap is assuming a break-up will release the value automatically.