Wholly Owned Subsidiaries

21st November 2021 0 By indiafreenotes

A wholly owned subsidiary is a company whose common stock is 100% owned by another company, the parent company. Whereas a company can become a wholly owned subsidiary through an acquisition by the parent company or having been spun off from the parent company, a regular subsidiary is 51% to 99% owned by the parent company.

When lower costs and risks are desirable or when it is not possible to obtain complete or majority control the parent company might introduce an affiliate, associate, or associate company in which it would own a minority stake.

A wholly owned subsidiary is a business operation in a foreign country that a firm fully owns. A firm can develop a wholly owned subsidiary through a greenfield venture, meaning that the firm creates the entire operation itself. Another possibility is purchasing an existing operation from a local company or another foreign operator.

Regardless of whether a firm builds a wholly owned subsidiary “from scratch” or purchases an existing operation, having a wholly owned subsidiary can be attractive because the firm maintains complete control over the operation and gets to keep all of the profits (or losses) that the operation makes. A wholly owned subsidiary can be quite risky, however, because the firm must pay all of the expenses required to set it up and operate it.

Advantages

  • Easy to manage as the strategic decision-making lies with the parent company.
  • Due to 100% control, it is easier to follow the parent company policies and procedures thus helping the group to achieve synergies.
  • The subsidiary company gets a tag of the parent group since it is merged in the group fully due to the 100% acquisition.
  • Results are been grouped under the parent company at each balance sheet date.
  • It increases the valuation of the subsidiary company since now it is under the umbrella of the parent group which is a big brand in the market.
  • The subsidiary company gets a good brand name by getting acquired by the top brand thus increasing the valuation and the market share of the parent company by acquiring an established player in the market.
  • Building relations with customers and investors become easy if the parent has strong connections in the market.

Disadvantages

  • Identification of M&A opportunities in the industry is a tough task.
  • Establishing relationships among vendors, regulators, bankers, investors, lenders take a lot of time since they are unaware of the functioning of the subsidiary.
  • Acquiring a new company or an existing company requires a lot of time working on the diligence process and finally closing the transaction.
  • Company operations and cultural differences can be a major concern.
  • In the case of a cross border acquisition, there are many regulatory laws that affect the functioning of the subsidiary. eg: In the parent company, a particular project might be permissible however in the subsidiary company, the local laws in the country may not permit it.