Code User Group Blog: March 2024 Holding Companies
As spring approaches (well in the UK and US) we tackled the rather tricky topic of Holding companies. As global organisations, private equity and even hedge funds utilise a variety of complex corporate structures, understanding the principles of a holding company and why they are used helps us identify, analyse and track wealth and wealth creation moments.
Whilst I appreciate that in the US and Australia accessing reliable company information is almost impossible, there are still sources where you can gain an insight into corporate structure and financial performance. In the UK we are certainly lucky to have companies house (which is soon to be integrated into Code) which gives us a breadth of information to support prospect research. Whilst initially this might seem the answer, understanding and sifting through such complex structures and information sets presents a challenge.
I initially put forward that a holding company is a king of investment vehicle established to hold the shares of other companies. The holding company itself doesn’t actually generate any products or services and creates no or minimal revenues / costs. There are many reasons for the establishment of a holding company and these centre on:
Risk management
Tax
Business strategy / international operations
Wealth planning
It is important to note that a subsidiary is a company within its own right and a holding company can own a vast array of subsidiaries either wholly or partially. These subsidiaries might operate strategically to deliver the aims and objectives of a group (Tesco is an example) or be a disparate range of organisations operating as a conglomerate such as Berkshire Hathaway.
When viewing holding company accounts the consolidated accounts is a sum of all the financial elements of each subsidiary. Obviously foreign exchange rates impact this consolidation process but we don’t want to get into the weeds of IFRS standards and hedge accounting! Therefore the consolidation income statement can be seen as the sum of all the holding companies subsidiaries turnover, costs and profits. The same concept applies to the consolidated balance sheet. When analysing the value of holding companies it is the consolidated accounts that you need to focus on.
We then analysed how an individual could be a shareholder of a holding company and a shareholder within a subsidiary. Whilst this is a little confusing and complex to initially understand, it is important to note a shareholder is an owner. Therefore anyone can own part / all of a holding company and also part / all of a a subsidiary and holding company. We discussed the implications this has upon dividend payments and the sale of companies.
Overall throughout all 3 user group sessions, we had some great discussions and questions, albeit perhaps I was slightly distracted due to the egg-citement of getting some easter eggs.
See you in a few weeks for the next user group, which will be focused on board roles.
Thanks,
Jon
