Investing in Philippines: What are holding companies? Understanding Parent and Subsidiary corporate relationship


Monday, November 29, 2010

What are holding companies? Understanding Parent and Subsidiary corporate relationship

Have you ever thought who owns the Starbucks franchise in the Philippines?

Rustan Coffee which is a subsidiary of Rustan Group owns Starbucks Philippines(need clarification here) which  is the franchisee of Starbucks in the Philippines.

If you look at the relationship between these companies one can clearly see which stands as the parent and which stands as the subsidiary. By definition a subsidiary is a corporation which is controlled by another company while a parent company is a corporation who has control over another company. 

The important term to remember is "control". What is control then?

Basically control is defined as having an influence over another. So in a corporate setting control is achieved if one company owns a majority share in a company thus giving such company the power to make decisions due to the majority voting rights.

The Philippine Stock Exchange have an index named Holding Firms. This index primarily have all the conglomerate that has shareholdings in businesses of various industry. 

To name a few the likes of JGS(JG Summit) of the Gokingwei's, AC(Ayala Corp.) of the Ayala's, SM(SM Investments) of the Sy's, LPZ(Lopez Group) of the Lopez's, and MPI(Metro Pacific Investments) of Manny V. Pangilinan of First Pacific are the known holding firms in the Philippines.

It is possible that a Parent/Holding Company is also a subsidiary of another company. In this case such company will be called the ultimate  parent company.  An ultimate parent company may be a domestic corporation or a foreign corporation. 

In that case the Parent corporation prepares its Financial report with two presentation that is as the corporation by itself and as consolidated report.(This topic will be discuss in another post).

Now why does one need to know such?

This is important because it gives an idea how a stock will be performing. So basically since the earnings of a parent company comes from its subsidiary one can gauge the value of a holding company through its subsidiary. 

An example is AC(Ayala Corp) with the good performance of BPI(Bank of the Philippine  Island) one might think that it is good to buy AC(which is good because AC is considered as a fundamentally sound corporation) but looking at its telecom business GLO(Globe Inc.) which has suffered set back in its operations due to the sluggish telecom industry one might concentrate more on BPI rather than investing its bulk of funds in AC.

At the same time it is also noteworthy to know that though such is interconnected it seems that the subsidiary and the parent are independent from one another.

So one still has to understand the nature of the company and the industry they are in. And it would be of great help knowing the diversified business a company ventures into.

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