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 1 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 2 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 3becoming a parent companythe two most common ways that companies become parent companies are either through the acquisitions of smaller companies or through spinoffs larger companies often buy out smaller companies to alleviate competition broaden their operations reduce overhead or gain synergies for example meta meta formerly 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 meta however has not exerted too much control keeping an autonomous team in place including its original founders and ceo 4businesses 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 is 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 considerationsbecause 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 that eliminate any and all overlaps such as intercompany 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 stand alone 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 