How do parent companies work?
Parent companies work by controlling over 51% of another company’s stock, giving it the majority control over the subsidiary’s operations. The parent company can choose to change the current direction and method of operations of a subsidiary, or it can simply choose to act as a hands-off ‘manager’.
Parent companies are usually created by acquiring smaller companies through takeovers, in which the parent buys up enough of the smaller company’s stock to give it majority voting rights. Most often, a company would seek to acquire smaller companies to reduce competition in that market, as well as to bring new employees on board and make use of the smaller company’s ideas and resources.
However, sometimes a company will carry out a spinoff – this is the creation of an independent company by issuing the parent company’s stakeholders with new shares in a subsidiary company. These new shares will then trade in the same way as the parent company’s shares. Usually, spinoffs occur when a parent company wants to cut ties with an underperforming part of its operations, or to optimise a subsidiary’s operations.
Most parent companies will issue one balance sheet which accounts for the operations of their subsidiaries. Traders can use a balance sheet as part of their fundamental analysis, which can provide the basis for whether a trader decides to open or close a position.