What is a parent company?
A parent company is a single company that has a controlling interest in one or more different companies, known as subsidiaries. The status of being a parent company gives it the right to control the operations of each of its subsidiaries and businesses started under it, to varying degrees. Meaning, the parent company can choose to be either directly or passively involved in the management of its subsidiaries. Either way, a parent company is accountable for the financial statements of its subsidiary.
How does a parent company work?
A parent company controls more than 51% of its subsidiary’s stocks, which means it has majority control over that company’s operations. When it comes to its involvement in a subsidiary, a parent company can take a hands-on approach, which means it can decide how its subsidiary should operate, even going so far as to change its direction and operations. Alternatively, if the parent company chooses a hands-off approach, it may let the subsidiary continue as is without being involved in its day-to-day operations. Most parent companies issue one balance sheet that includes their subsidiaries’ operations.
Often, a parent company is a conglomerate, which is a large company that owns and controls a number of different companies across a range of varied sectors. This structure enables the parent company’s subsidiaries to work together across brands and to benefit from each other’s resources. For example, Procter & Gamble, Amazon, Unilever and Johnson & Johnson are large conglomerates that each own multiple businesses spanning diverse sectors ranging from food to cleaning products to medicine and beauty/hygiene products, and more. All benefit from cross-branding opportunities.
Whether a conglomerate or not, when a parent company acquires smaller companies, it gets access to their management, staff, resources. and other assets such as their business website. This adds value to the overall group, as it creates a larger pool of talent and expertise.
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How does a company become a parent company?
In general, a parent company is formed when it acquires a smaller company through a merger or takeover. As previously mentioned, the parent company will buy up enough of the smaller company’s stock to give it majority (51% or more) voting rights. As mentioned, usually, a larger company is interested in becoming a parent company when it is interested in reducing costs as well as competition in a particular market and/or expanding its current operations, workforce employees and resources. It may seek to buy a smaller company to meet one or all of these goals. For example, Facebook became a parent company when it bought Instagram and, later, WhatsApp to boost user engagement and to strengthen its own social media platform. Meanwhile, Instagram gets an additional social media platform, which means more users and more space to advertise.
What are examples of a parent company?
Parent companies and their subsidiaries may be horizontally or vertically integrated.
Horizontally integrated: This means that all the companies involved operate within the same industry, which leads to expanded market share and opportunities to cut costs. For example Gap Inc is the parent company of Banana Republic and Old Navy, two clothing and fashion subsidiaries. Another example is Kraft Foods, Nestle, Kellogg’s, Mars, Coca Cola, and Pepsi Cola, all of which have numerous food, drink and snack companies as subsidiaries. Facebook’s acquisition of Instagram in 2012 is another popular example, since both are in social media.
Vertically integrated: This means that a parent company owns subsidiaries that are at different stages of the same industry’s supply or production chain. Parent companies can reduce their manufacturing costs by purchasing their suppliers, or vice versa. Besides reducing producing costs, the benefit for parent companies may include enhancing the supply chain, getting access to new distribution channels, and increased profits. For example, AT&T acquired Time Warner in 2018, effectively becoming the owner of the company that produced films and broadcasters that sold those productions to audiences. Addition to its telecommunications networks that provided the media infrastructure.
How is a parent company different from a holding company?
A parent company is a type of business, different from a holding or shell company. The main difference is that a parent company conducts or at least has a role in conducting the business operations and management of its subsidiaries. In contrast, a holding or shell company is set up to be a passive owner of a group of several subsidiaries, usually for tax purposes. In short, a parent company typically has a direct influence or say over the operations of its subsidiaries while a holding company does not.
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FAQ (Frequently asked questions)
What is an example of a parent company?
Meta is an example of a parent company. Its subsidiaries include Facebook, WhatsApp and Instagram. Another famous example is Alphabet which also owns Google.
What is a parent company vs a subsidiary company?
A parent company owns, or must own at least 50%, of a subsidiary company. A subsidiary is an independent company in its own right at the same time.