What Is a Parent Company?
A parent company is a company that has a controlling interest in another company, giving it control of its operations. Parent companies can be either hands-on or hands-off owners of its subsidiaries, depending on the amount of managerial control given to subsidiary managers, but will always maintain a certain level of active control.
- A parent company is a single company that has a controlling interest in another company or companies.
- Parent companies are formed when they spin-off or carve out subsidiaries, or through an acquisition or merger.
- Parent companies must account for their subsidiaries appropriately on their financial statements and for tax purposes.
How a Parent Company Works
Parent companies can be conglomerates, made up of a number of different, seemingly unrelated businesses, like General Electric (GE), whose diverse business units are able to benefit from cross-branding. A parent company, however, is different from a holding company. Parent companies conduct their own business operations, unlike holding or shell companies which are set up specifically to passively own a group of subsidiaries—often for tax purposes.
Parent companies and their subsidiaries may be horizontally integrated, like Gap Inc, which owns the Old Navy and Banana Republic subsidiaries. Or they may be vertically integrated, by owning several companies at different stages along the production or the supply chain. For instance, AT&T’s acquisition of Time Warner meant that it became owner of both the film production business and broadcasters that sold those productions to audiences, in addition to its telecommunications networks that provided the media infrastructure.
Becoming a Parent Company
Larger companies often buy out smaller companies to alleviate competition, broaden their operations, reduce overhead, or to gain synergies. For example, Facebook acquired Instagram to increase overall user engagement and strengthen its own platform, while Instagram benefits from having an additional platform on which to advertise and more users. Facebook, though has not exerted too much control, keeping an autonomous team in place, including its original founders and CEO.
Businesses that want to streamline their operations often spin off less productive or unrelated subsidiary businesses. For instance, a company might spin off one of its mature business units that are not growing, so it can focus on a product or service with better growth prospects. On the other hand, if a part of the business is headed in a different direction and has different strategic priorities from the parent company, it may be spun off so it can unlock value as an independent operation—and perhaps be put up for sale.
Special Considerations: Accounting for Subsidiaries
Because parent companies own more than 50% of the voting stock in a subsidiary, they have to produce consolidated financial statements that combine the parent and subsidiary financial statements into one larger set of financial statements—and which eliminate any and all overlaps, such as inter-company transfers, payments, and loans.
These combined financial statements provide a picture of the overall health of the entire group of companies as opposed to one company's standalone position. If the ownership stake of the parent company is less than 100%, a minority interest is recorded on the balance sheet to account for the portion of the subsidiary that is not owned by the parent company.