Holding Company (Parent Company)

Corporate Finance Tutorials

What is a Holding Company (Parent Company)?

The parent company or a holding company is a company with majority voting rights of other companies (subsidiaries) to control its management and the operations of that company. A wholly owned subsidiary would be the one wherein the parent company has 100% of the voting rights. A partially owned subsidiary company will be where the parent company has more than 50% of the voting rights.

The Walt Disney Company (Holding Company) has more than 50 subsidiaries. Partial list of subsidiary companies is provided below

You may check out the full list here

The relationship between Holding Company and Subsidiary Company?

When the original company (holding company) wishes to expand its business, the directors and other stakeholders decide to open its next unit in order to further handle the expanded business for its smooth functioning. The next unit, the new firm is called a subsidiary or sister concern of the original company (holding company)

When a business is expanded, the subsidiary may carry out the same line of business (with expansion to other locations) or vary with the original operation (with expansion being a new line of business). Whatsoever, the parent company and subsidiary is an independent organization, however, the original company holds the majority of shares in this concern (the reason for it being called as a subsidiary or sister concern).

Parent Company Nike Inc Example

Nike Inc has more than 100 subsidiary companies. The partial list of the subsidiaries is provided below.

You may have a look at the full list of the subsidiaries here

Rights of the Holding Company

Holds more than 50% of rights in the subsidiary company.
Controlling power over the subsidiary company.
Maintains voting rights regarding the subsidiary company.

Responsibilities of the Parent Company

Needs to report its financials by including those of the subsidiary company as well, since it holds 50% or more of the rights in the subsidiary company.
Responsible for tax obligations of the subsidiary as well.
Liable for the sister concern’s operation of business and management of resources in its location.
Sometimes serves as a guarantor for the subsidiary in their financial requirements.

Acquisition of Holding Company

The parent company is formed not only by the expansion of business, and creation of a new subsidiary unit but also through acquisition. Upon acquiring the majority of ownership of a particular company by another well-established company, the rights are transferred to the acquiring company, which makes it the “parent company”.

With such an acquisition, companies gain through synergies, or the holding company gets an extended advantage from the subsidiary in its own line of business. For example, the acquisition of Sahara Airways by Jet Airways was beneficial to Jet in terms of expansion. On the other hand, upon Microsoft acquiring LinkedIn on the social networking site, both Microsoft and LinkedIn are functional yet benefit from each other synergies. Microsoft can provide a platform to its existing customers to enhance their employment strategies with the help of LinkedIn, while LinkedIn has a very good platform by Microsoft to provide its services to all customers (can even create new schemes for its customers).

In cases of acquisition, the shareholders of the holding company are offered the shares of the subsidiary company as well. The voting rights of the shareholders for the parent company get extended to the subsidiary too.

Another benefit upon acquisition is that when the assets are transferred between the two companies holding company and subsidiary, the tax effect on the capital gain for the receiver company can be avoided. Other tax benefits like tax benefits arising from dividend payouts of one company can be used by the other one as well.

Conclusion

There are quite some benefits to the holding company and subsidiary model. A parent company invites a lot of opportunities for the subsidiary company and its employees. Most of the times, it works towards benefitting both the companies. A lot of investment banks in Luxembourg countries hold a sister concern in off-shore countries, which contribute to the middle office and back operations of their holding company. The parent company and subsidiary in such cases hold the majority of shares of such subsidiaries thereby being allowed for making major decisions, plus, the sister concern is welcome to enjoy the common rights of the holding company. Thus, it creates a synergy between both the companies and hence brings out the best of the performance of both companies.

Acquisitions and mergers can be some good news to new investors as well. A well-established firm may acquire the rights of a smaller company, thereby becoming its parent company. In such cases, operations of the smaller company are enhanced manifold, giving much better opportunities to new investors to invest in it, and may offer promising returns to them.

What is a Holding Company (Parent Company)?