What is a Parent Company?
A ‘parent company’, as the name suggests, is a company that controls or has a majority interest in another company, i.e., a subsidiary company, thereby having the right to control the latter’s operations. Parent companies can either be directly involved in the functioning of their subsidiaries or can follow a more hands-off approach in their managerial control.
- A parent company owns, manages, or has controlling interests in another company or a group of companies, known as subsidiaries.
- The most common way through which a company can become a parent company is either through merger, acquisition or spin-offs.
- A parent company has many merits like overall control of assets, availing tax benefits, etc.
- However, there are certain demerits associated with the parent company like centralisation of economic power, exploitation and misuse of its subsidiary’s resources, over-capitalisation, etc.
Frequently Asked Questions
What are the merits of being a parent company?
A parent company enjoys many benefits. Some of them are enumerated as follows:
- Controls all assets
While subsidiary companies carry out their day-to-day business operations, it is the parent company that controls the entire assets of its groups, be it physical property, equipment, or intellectual property.
- Minimise tax
To avail tax benefits, a parent company can establish a subsidiary company in a particular region and can take advantage of tax credits, etc.
- Day-to-day monitoring not required
The parent company is not required to manage daily affairs of its subsidiary companies. It can focus on its core operations as subsidiaries have their own management to conduct their business operations.
What are the demerits of a parent company?
Apart from enjoying benefits, a parent company also has certain demerits like:
- Over capitalisation
When the capital of both the parent as well as the subsidiary company is clubbed together, chances of over capitalisation gather strength, wherein the shareholders may not get a fair return on the money invested.
- Exploitation of subsidiary companies
The parent company may use its subsidiary company to its advantage and may compel the latter to sell the products to the former at lower and subsidised rates.
- Accumulation of economic power
As parent companies own one or many subsidiary companies, it may lead to concentration of economic power into the hands of a few, which may be harmful for the public at large.
Sometimes, parent companies may misuse any information pertaining to their subsidiary companies as per their own benefits like tax exemptions, etc.
- Misuse of power
As the parent company holds a significant amount of power over its subsidiary company, it may lead to misuse of power by the former.
How can an entity become a parent company?
The most common ways through which a company can become a parent company are given below:
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Big companies generally acquire smaller companies to ease out the competition, enhance their business operations, gain synergies, or reduce business expenses. One of the most common examples is the acquisition of Instagram by Facebook to increase its overall customer base and strengthen its business operations.
Also, at times, companies’ might spin-off lesser productive units so that more focus can be shifted to the business entities with better prospects. This is usually done if a parent company wants to do away with the underperforming company or wants to maximise the business operations of subsidiary companies.
What are famous examples of some parent companies?
Some of the most influential parent companies which control numerous subsidiaries are mentioned below:
- Procter & Gamble
This world-renowned company operates in about 180 countries and boasts over 80 brands. Some of its prominent subsidiaries include Gillette, Head & Shoulders, Olay, Pantene, Oral-B, Pampers and many more.
The popular beverages and snacks company has many notable subsidiaries like Pepsi, Mountain Dew, Ruffles, Aquafina, 7 Up, and Tropicana, etc.
- The Walt Disney Company
The multimedia Group’s subsidiaries include ABC Television Group, Disneyland, Disney Channel, and Marvel, etc.
- Johnson & Johnson
The consumer and healthcare company’s famous subsidiaries are Band-Aid, Clean & Clear, Neutrogena and Acuvue, among others.
Another famous parent company is Comcast, which boasts popular subsidiary companies like Movies 24, NBC Universal, and NHL TV, etc.
One of the leading forces in the entertainment sector has many subsidiaries, which include Paramount, VH1, Nickelodeon, MTV, Nick Jr., and Teen Nick, etc.
- Time Warner
The multinational entertainment conglomerate has numerous famous subsidiaries like Entertainment Weekly, Time Magazine, CNN News Group, HBO, People, and many more.
How does a parent company make money?
Broadly speaking, a parent company generally makes money through:
- Buying and selling of assets.
- Profits and gains made through dividends and shares.
- By providing an array of specialised services towards its subsidiaries.
Other ways by which a parent company can earn revenue is through interest payments, rents, back-office functions, etc., which it provides to its subsidiary companies.
Is there any difference between a parent company and a holding company?
A parent company is virtually a holding company, with a slight variance among the two.
That business entity that invests in other companies and does not actually produce goods and services and at the same time does not carry out business operations of its own, is termed as a holding company. In other words, a holding company has investments in other companies that produce goods or offer services.
Whereas, when a company runs its own business operations and, at the same time, also owns/ manages the businesses of other entities, it is known as a parent company.
A prominent example of a holding company is Berkshire Hathaway, whose subsidiaries include Fruit of the Loom and Dairy Queen, among other businesses. Alphabet is another example of a holding company, which owns Google, Nest, YouTube, and various other companies.
In short, parent companies emerge as an efficient tool for the protection of assets and in generation of profits. Moreover, they also help in reducing taxes, managing risks, and fostering innovation.