Whether the parent company is the sole or majority stockholder of the subsidiary company, it will have virtually total control of the subsidiary company’s operations. As a majority stockholder, the parent company has the ability to remove or appoint board members for the subsidiary company and is also allowed to decide how the subsidiary will operate. Parent companies can be directly involved in the operations of the subsidiary company, or they can take a completely hands-off approach. For instance, the parent company can allow the subsidiary company to retain its managerial control. Subsidiary companies can be wholly or partially owned by a parent company, but a parent company is required to own over half of the voting stock in the subsidiary company.
Larger companies often buy out smaller companies to alleviate competition, broaden their operations, reduce overhead, or gain synergies. Meta, however, has not exerted too much control, keeping an autonomous team in place, including its original founders and CEO. A parent company is a company that has a controlling interest in another company, giving it control of its operations. Companies often need the assistance of legal and financial experts to navigate these transactions successfully. The best choice depends on the company’s specific circumstances and objectives. As we delve deeper into the world of subsidiaries, having a visual guide can be invaluable.
Two or more subsidiaries majority owned by the same parent company are called sister companies. Bank of America (BAC) still generates the majority of its revenue in its domestic market in the parent and all subsidiaries together can be termed as U.S. but its acquisition of Merrill Lynch allowed it to establish international operations. London-based Merrill Lynch International is one of Bank of America’s (BAC) largest operating subsidiaries outside the U.S.
This agility can give companies a competitive edge in rapidly changing marketplaces. While the parent company can still guide the subsidiary’s strategic direction, it must also consider the interests of other owners. Despite this, the parent company has enough voting power to influence or even control major decisions. Several subsidiaries and affiliated companies can collectively tap into new markets, customer segments, and geographic regions, thereby expanding their market presence and enhancing their overall competitiveness.
The advantages of these business structures include tax benefits, reduced risk, increased efficiencies, and diversification. The main reason to form a holding company is to have access to tax advantages. If a subsidiary company is included in the parent company’s corporate identity, the parent company will need to use audited statements to report subsidiary results. Parent companies can be conglomerates, made up of a number of different, seemingly unrelated businesses, like General Electric (GE), whose diverse business units are able to benefit from cross-branding. Parent companies conduct their own business operations, unlike holding or shell companies, which are set up specifically to passively own a group of subsidiaries—often for tax purposes.
A parent company typically actively manages its own ventures and makes purchases to aid in its overall operations with its other subsidiaries. Parent companies are most commonly created by mergers and acquisitions or through spin-offs. The subsidiaries can be vertically or horizontally integrated to help improve the parent company’s structure. A subsidiary is a business entity that is owned by another company, which is called the parent company. The parent company usually has a majority stake in the subsidiary, which means it owns at least 50% of its common stock.
Parent companies can either establish their own subsidiaries or can purchase an existing company. This threshold can profoundly impact the level of control exercised by the parent company, with higher ownership percentages typically conferring greater control. The ownership structure also influences the relationship between the parent company and its subsidiaries, with varying degrees of autonomy and decision-making authority. However, given their controlling interest, parent companies often have considerable influence over their subsidiaries. They—along with other subsidiary shareholders, if any—vote to elect a subsidiary company’s board of directors, and there may often be a board-member overlap between a subsidiary and its parent company. This gives the parent company total control over the subsidiary’s operations.
They both operate in the same industry of social media, and Facebook saw an opportunity to grow its market share and strengthen its photo-sharing platform with the acquisition of Instagram. Although Instagram still operates on its own, Facebook saw the additional benefits of reduced competition, increased operating and marketing synergies, and much more. The ownership of a subsidiary can be quite complex, and there are many ways to get control. The most common and straightforward way is through 50% or more ownership of voting shares to exercise control of that subsidiary. Buying an interest in a subsidiary usually requires a smaller investment on the part of the parent company than a merger would.
This involves allocating a portion of the subsidiary’s net income and equity to the minority shareholders, which can be a nuanced task requiring specialized accounting expertise. Parent company structures play a pivotal role in the global business landscape, influencing everything from financial reporting to strategic management. These entities can shape markets, drive innovation, and impact economies on multiple levels.
While subsidiary company directors are allowed to manage the company as they see fit, the parent company can remove the directors in the event of unsatisfactory performance. Allowing directors to run the subsidiary company without constant oversight is generally a much better solution than the parent company dictating operations. Businesses that want to streamline their operations often spin off less productive or unrelated subsidiary businesses. For instance, a company might spin off one of its mature business units that is not growing, so it can focus on a product or service with better growth prospects.