Holding company is an organization that has the power to control the affairs of another company by virtue of holding more than 50% of its equity. There are companies that owned a small proportion of stock of another company but gradually acquired more shares of that company and finally became a holding company while the company that they hold in this manner is referred to as subsidiary company. When a company acquires more than 50% of the capital of another company, it becomes its holding company and has the power to manage its operations or to form an altogether new company out of the subsidiary company if it so desires. There is no hard and fast rule to have more than 50% of the equity in a company to exercise control, and there have been instances when a company became the holding company when it had barely 10% of the equity of another company. This happens when the equity of a company is distributed in many hands and no one possesses more than 10% of the equity.
The relationship between a holding company and its subsidiary company is that of a parent and child relationship. There is a special case where all the equity of a company is held by another company. In such instances, the subsidiary company becomes wholly owned subsidiary of the holding company. There are also instances when a subsidiary company becomes a holding company by acquiring majority equity in another company which in turn goes on to hold another company and so on. This then becomes a pyramid like structure where the top most company is a holding company of all the companies below. SEC does not allow more than two levels in public utility companies.
Then there are purely holding companies that do not engage in any business operations but exist only to hold majority equity in subsidiary companies. But if the parent company also engages in separate business activities it is called as a mixed holding company. Forming a new company from the scratch is a very tedious and costly affair and in comparison becoming a holding company is easier and less costly. In contrast to a merger or acquisition, a holding company requires only controlling stake in another company to reap all the rewards. In the amount that one can hold two companies, one can make a single company of that magnitude. This is why there are many companies that are performing the role of a holding company only.
Other benefit to the holding company accrues in the form of assets that are shown in its financial statement. The shares of the subsidiary company become assets for the holding company that it can use to acquire controlling stake in another company. In a clever accounting ploy, the assets of holding company and a subsidiary company are kept separate to avoid any claim of the shareholders. In reality however, the holding company and its subsidiary companies are considered as one economic entity.
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In brief: Holding Company vs Subsidiary Company • When a company acquires majority shares in another company, it becomes a holding company and the company whose share it acquires becomes a subsidiary company. • The relationship between the holding and subsidiary company is that of a parent and child. • Many companies are formed with the sole intent of becoming holding companies.
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