Wholly Owned Subsidiary Definition
Wholly Owned Subsidiary is a separate independent legal entity which is 100% owned and control by other company (parent company) and directly works under the guidance and decision making of the parent company. It has its own senior management to control the business operations of the company however all the strategic decisions at the group level are been taken by the parent company only.
- The purpose of making a wholly-owned subsidiary is to diversify the business operations of the company and create a separate channel to run it.
- Since it is a 100% holding, all the funds infused in the subsidiary is of the parent company and they are free to decide about the future prospects as well.
- As a wholly-owned subsidiary company, the financial results of the same would be combined with the parent company in the annual report of the parent company on the balance sheet date.
Examples of Wholly Owned Subsidiary
- Starbucks company Japan is a wholly-owned subsidiary of the Starbucks group.
- The Walt Disney Company holds 100% of the share capital of Marvel entertainment and EDL Holdings.
- Volkswagen AG owns the entire Volkswagen America.
ABC holds 100% in DEF and DEF holds 100% in XYZ. In this case, DEF and XYZ both are the wholly-owned subsidiary companies of ABC and the financial statements of both the companies needs to be merged into the parent company ABC at the group level.
ABC holds 99% in DEF. In this case, there are 1% minority shareholders in the company which is not been acquired. Hence this is not a wholly-owned subsidiary company since ABC does not control 100% of the share capital of the company. In order to become a wholly-owned subsidiary, the parent company ABC needs to acquire the 1% minority shares from the public to gain full control over the operations of the company.
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ABC holds 99% in DEF and DEF holds 100% in XYZ. In this Case since DEF holds full share capital of XYZ, XYZ is a wholly-owned subsidiary of DEF and DEF is a parent company for XYX. But DEF is not the wholly-owned subsidiary of ABC since full capital is not owned. Here DEF will prepare consolidated financials with XYZ and ABC will prepare the financials of its own but there will not be any need to reflect the results of the subsidiary companies in its annual report since there is no full control by ABC and still, 1% shares are pending to be acquired.
Advantages of Wholly Owned Subsidiary
Below are some of the advantages :
- Due to 100% control, it is easier to follow the parent company policies and procedures thus helping the group to achieve synergies.
- Easy to manage as the strategic decision making lies with the parent company.
- The subsidiary company gets a tag of the parent group since it is merged in the group fully due to the 100% acquisition.
- It increases the valuation of the subsidiary company since now it is under the umbrella of the parent group which is a big brand in the market.
- Results are been grouped under the parent company at each balance sheet date.
- The subsidiary company gets a good brand name by getting acquired by the top brand thus increasing the valuation and the market share of the parent company by acquiring an established player in the market.
- Building relations with customers and investors become easy if the parent has strong connections in the market.
Below are some of the disadvantages :
- Acquiring a new company or an existing company requires a lot of time working on the diligence process and finally closing the transaction.
- Identification of M&A opportunities in the industry is a tough task.
- Establishing relationships among vendors, regulators, bankers, investors, lenders take a lot of time since they are unaware of the functioning of the subsidiary.
- In case of a cross border acquisition, there are many regulatory laws that affect the functioning of the subsidiary. Eg: In the parent company, a particular project might be permissible however in the subsidiary company, the local laws in the country may not permit it.
- Company operations and cultural differences can be a major concern.
Wholly Owned Subsidiary is a 100% controlled company. All the 100% controlled companies need to report their balance sheets, income statements, and cash flow statements to the group in order to merge the same with the parent financials on each reporting date as per the accounting framework. There are certain exemptions for the wholly-owned subsidiary company both in legal and tax laws to encourage new investment by the parent company and creating more companies in order to increase employment.
This has been a guide to what is a Wholly Owned Subsidiary and its definition. Here we discuss examples of wholly-owned subsidiary along with advantages and disadvantages. You can learn more about Corporate Finance from following articles –