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What is a 'Subsidiary'

A subsidiary is a company with voting stock that is more than 50% controlled by another company, usually referred to as the parent company or the holding company. A subsidiary is partly or completely owned by the parent company, which holds a controlling interest in the subsidiary company. In cases where a parent company owns a foreign subsidiary, the subsidiary must follow the laws of the country where it is incorporated and operates, and the parent company carries the foreign subsidiary's financials on its consolidated financial statements.

BREAKING DOWN 'Subsidiary'

"Subsidiary" is an adjective that describes when something or someone serves to assist or supplement another thing or another person. In a business setting, a subsidiary becomes part of a parent company to provide the parent with specific synergies, such as increased tax benefits, diversified risk, or assets in the form of earnings, equipment or property. For these purposes, liabilities, taxation and regulations treat subsidiaries as distinct legal entities.

The purchase of interest in a subsidiary differs from a merger in that the parent corporation can acquire the controlling interest with a smaller investment. Additionally, stockholder approval is not required in the formation of a subsidiary as it would be in the event of a merger. Warren Buffett's Berkshire Hathaway Inc., for example, has a long and diverse list of subsidiaries, including Clayton Homes, the Pampered Chef, GEICO Auto Insurance and Helzberg Diamonds.

How a Subsidiary Operates

Like Berkshire Hathaway, Alphabet Inc. has many subsidiaries. These separate business entities all perform unique operations that add value to Alphabet through diversification, revenue, earnings, and research and development (R&D).

For example, Sidewalk Labs, a small startup that is a subsidiary of Alphabet, seeks to modernize public transit in the United States. The company has developed a public transportation management system called Flow, which aggregates millions of data points from smartphones, cars and Wi-Fi hotspots to analyze and predict where traffic and commuters are most congregated. The system can redirect public transportation resources, such as buses, to these congested areas to keep the public transit system moving efficiently.

As of June 28, 2016, the Flow platform is running in a wide-scale test in Columbus, Ohio. For Alphabet, Sidewalk Labs provides it with a business unit that develops technology that can one day help the entire company. Since one of Alphabet's largest products is Google Maps, subsidiaries such as Sidewalk Labs can strengthen the company's overall business operations.

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