What is a 'Parent Company'
A parent company is a company that controls other, smaller businesses by owning an influential amount of voting stock or control. Parent companies are typically larger firms that exhibit control over one or more small subsidiaries in either the same industry or complimentary industries. Parent companies can be either hands-on or hands-off with subsidiaries, depending on the amount of managerial control given to subsidiary managers.
BREAKING DOWN 'Parent Company'
A parent company is a larger corporation that has significant ownership over a subsidiary or group of subsidiaries. These partially or wholly-owned smaller companies are controlled by the parent, to varying degrees; however, all parent companies, for the most part, own more than 50% of a subsidiary's voting stock.
Parent companies can either be conglomerates or holding companies. A conglomerate, such as General Electric, is a huge company with its own business venture that also owns other companies with their own business ventures. A holding company, on the other hand, is put in place specifically to own a group of subsidiaries and does not conduct its own business operations. Holding companies normally form to realize tax advantages among a connected group of smaller companies.
Companies can become parent companies by many different means. The two most common ways are through the acquisitions of smaller companies and the spinoff or creation of subsidiaries. For the purposes of accounting, parent companies report results of subsidiaries on audited statements when subsidiaries fall under the same corporate identity.
Examples of Parent Companies
As of 2016, parent companies are common in public markets. in fact, with a rise in corporate mergers and top-heavy industries, parent companies are becoming the norm. When Facebook acquired Instagram, for example, it became Instagram's parent company. Instagram, on the other hand, became Facebook's subsidiary. The two companies operate in joint ventures, but Instagram still has an autonomous team in place, including its original founders and CEO.
This type of parent/subsidiary relationship allows Facebook to realize the benefits of owning Instagram without exerting too much control, giving its team the autonomy it needs to run the business efficiently. Facebook, through Instagram, has an additional platform on which to advertise, an extra source of monthly users and a popular photo-sharing service that strengthens its own platform.
Another example of a parent company is the much more fragmented business of Johnson & Johnson. The company has become a huge conglomerate that is made up of hundreds of business units and product lines. The benefits are two-fold: Johnson & Johnson is able to diversify its revenues, and it is also able increase the sales of its individual business units by branding each product with the Johnson & Johnson name.