What Is a Parent Company?

Definition and Example of a Parent Company

Parent companies are most often created through a merger or acquisition or by a company spinning off a division to form a separate company.

Meta (formerly Facebook) is an example of a parent company through acquisition because it owns companies such as Instagram and WhatsApp. Meta acquired Instagram in 2012 and Whatsapp in 2014.

A well-known spinoff occurred in 2015 when eBay created a separate publicly traded company called PayPal. In that instance, eBay Inc. stockholders received one share of PayPal common stock for each share of eBay Inc. common stock held on the record date for the distribution of PayPal shares.

How a Parent Company Works

A collection of companies, sometimes referred to as a conglomerate, can have a complex, multitiered corporate structure. Parent companies and their subsidiaries often operate in the same business arena, such as social media platforms Meta and Instagram.

A parent company can take an active role in the operation of a subsidiary or let existing management make the bulk of the business decisions. Amazon is the parent company of Zappos and Whole Foods, acquiring the former in 2009 and the latter in 2017. Both acquired companies established brand identities and customer-loyalty practices before Amazon’s purchase. In general, the two businesses continued to operate similarly under Amazon’s ownership.

Larger companies often purchase smaller ones (and become parent companies) to expand operations, acquire a business’s customer base, or enter a new area of business that is a good fit synergistically. They aim to diversify their industries and risks, create vertical or horizontal integrations, or participate in the next wave of technologies or business models, such as banks that acquire fintech companies.

For example, Amazon delivered groceries via Internet orders before purchasing Whole Foods. Acquiring Whole Foods instantly gave Amazon physical grocery stores and access to learning about operating actual grocery stores. As analysts have stated, the purchase notified other grocery industry businesses that Amazon was entering the space. In addition, members of Amazon Prime receive a discount at Whole Foods.

Parent Company vs. Holding Company vs. Subsidiary

A company that owns a collection of companies with smaller market values is sometimes called a holding company. While a parent company and a holding company own other businesses, they are not technically the same. A holding company typically doesn’t have any operations, Instead, the company holds investments in other companies. Meanwhile, a parent company runs its own operations while also owning other companies.

As mentioned above, Meta (formerly Facebook) is an example of a parent company. Johnson & Johnson is a classic example of a holding company. It owns more than 250 separate businesses, primarily in the consumer health care and medical categories, but it does not have operations, activities, or an active business itself.

• Parent company: A business with operations while also holding a majority share of other companies
• Holding company: A financial entity that uses its capital to acquire controlling interests in several operating companies, but does not operate those companies
• Subsidiary: A company whose majority shares are owned by another company

What It Means for Individual Investors

Investors should be aware of the full slate of companies that a parent company owns before purchasing shares of its stock. Subsidiaries typically are identified in the regular course of researching a company.

When you buy a stock, you look at the company’s financial statements. For a parent company, its consolidated financial statements will also include business and financial details for each subsidiary.

Corporations have a lot of flexibility in reporting publicly traded spinoffs in their financial statements. However, the U.S. Securities and Exchange Commission requires a parent company to provide adequate information about spinoffs to shareholders and the trading public.

Understanding a parent company’s hierarchy and involvement with a subsidiary will help investors determine the managerial relationship between the parent company and the subsidiary.