What can a holding company not do?
Understanding Holding Companies
A holding company serves as a parent entity that owns and supervises various businesses. Rather than producing goods or offering services, its primary focus is on managing subsidiary companies and their brands, maintaining control through its voting stock. This structure allows the parent company to exert influence without getting involved in daily operations.
Example of a Holding Company: Alphabet Inc.
Alphabet Inc. (GOOGL) operates as a holding company for Google and several other tech enterprises, including Nest, Waymo, DeepMind, and Fitbit. While Google manages its own operations in search, advertising, and various internet services, Alphabet is responsible for overseeing the overall corporate strategy and assets across its array of companies.
Uses for a Holding Company
By holding controlling stakes in multiple firms, a parent company can gain competitive advantages that are unattainable for a standalone business. This strategy became more prominent during the early 20th century's trust-busting era, as companies looked for legal means to maintain scale and efficiency while adhering to new antitrust laws.
Disadvantages of Holding Companies
However, there are some drawbacks, including the tendency for investors to value holding companies less than if each business functioned independently. Researchers have identified several reasons for this phenomenon:
Inefficient Capital Allocation: When a holding company encompasses various businesses, it resembles having multiple bank accounts without the ability to transfer funds quickly. For instance, if the furniture division requires immediate cash for new equipment, but the majority of the funds are tied up in the tech sector, the opportunity for growth may be lost.
Lack of Expertise: Executives may excel at managing one type of business but likely lack expertise across all industries they oversee. This leaves outsiders questioning how a company can effectively operate in disparate sectors, such as candy, insurance, and railroads.
Complexity of Management: Monitoring the performance of each business and ensuring optimal operation across the board is akin to trying to follow ten television shows simultaneously. Important details can easily be overlooked due to the overwhelming amount of information to track.
Additionally, regulatory compliance becomes more challenging, especially for firms operating in multiple jurisdictions and industries. Conflicts of interest may arise between the holding company's objectives and those of individual subsidiaries, particularly when other shareholders are involved. Our office can effectively address any legal questions about holding companies. If you have any questions, please fill out the following form below and a Business Lawyer from our office will get back to you.
