Parent company definition

What is a parent company?

A parent company is one which has a controlling or majority interest in another company, which gives it the right to control the subsidiary’s operations. Parent companies can be directly involved in the management of their subsidiaries, or they can have a more hands-off approach.

Parent company vs holding company

While a parent company often has a direct say over the operations of its subsidiaries, a holding company does not. Usually, holding companies are set up specifically to group several subsidiaries together, often for tax purposes.

In contrast, parent companies can be conglomerates – a company which owns and controls a collection of companies across a range of sectors. This enables the subsidiaries that the parent company owns to work together across brands and benefit from each other’s resources.

Also, by acquiring smaller companies, the parent company gets access to their staff and management, meaning that they can bring on fresh talent to the overall benefit of the group.

How do parent companies work?

Parent companies work by controlling over 51% of another company’s stock, giving it the majority control over the subsidiary’s operations. The parent company can choose to change the current direction and method of operations of a subsidiary, or it can simply choose to act as a hands-off ‘manager’.

Parent companies are usually created by acquiring smaller companies through takeovers, in which the parent buys up enough of the smaller company’s stock to give it majority voting rights. Most often, a company would seek to acquire smaller companies to reduce competition in that market, as well as to bring new employees on board and make use of the smaller company’s ideas and resources.

However, sometimes a company will carry out a spinoff – this is the creation of an independent company by issuing the parent company’s stakeholders with new shares in a subsidiary company. These new shares will then trade in the same way as the parent company’s shares. Usually, spinoffs occur when a parent company wants to cut ties with an underperforming part of its operations, or to optimise a subsidiary’s operations.

Most parent companies will issue one balance sheet which accounts for the operations of their subsidiaries. Traders can use a balance sheet as part of their fundamental analysis, which can provide the basis for whether a trader decides to open or close a position.

Examples of parent companies

Let’s look at two examples of well-known parent companies: Alphabet Inc. and Facebook.

Alphabet was formed in 2015 by Google’s founders Larry Page and Sergey Brin, to make operations more streamlined and the company more accountable to shareholders. In creating Alphabet, Page and Brin slimmed down Google and incorporated the companies that were focused on separate industry sectors – such as Life Sciences and Calico – under Alphabet.

Facebook has also become a parent company after several high-level acquisitions over the years – most notably, Instagram and WhatsApp. Facebook CEO Mark Zuckerberg has stated that Facebook does not buy a company for the company, but to get excellent people.