What It Is, Advantages and Disadvantages

A holding company is a parent company that owns and oversees other businesses. Instead of making products or providing services, it focuses on managing subsidiary businesses and brands while maintaining control through its voting stock. This allows the parent company to exercise control without participating in day-to-day operations.

Alphabet Inc. (GOOGL) is a holding company that owns Google and several other technology companies, such as Nest, Waymo, Deepmind, and Fitbit. While Google continues its operations in search, advertising, and other internet services, Alphabet manages the overall corporate strategy and assets across its portfolio of companies.

What Is a Holding Company?

Holding companies as we know them got their start during America’s Industrial Revolution. Railroad magnates like J.P. Morgan pioneered this organizational model to consolidate control over various railway lines while maintaining separate operating entities. Soon, Standard Oil and U.S. Steel used holding company structures to dominate entire sectors of the economy.

By owning controlling stakes in multiple companies, a parent firm could enjoy competitive advantages that would be impossible for a single firm. The approach gained added prominence during the trust-busting era of the early 20th century when companies sought legal ways to maintain scale and efficiency without running afoul of new antitrust regulations.

Here’s how it works: The holding company buys enough shares (usually more than half) of other companies to call the shots on major decisions. This control doesn’t require the holding company to engage in the daily operations of these businesses. Instead, the holding company sets strategic goals, appoints board members, and oversees major financial decisions. The parent company might also provide centralized services like financial management and legal counsel.

The subsidiaries often run independently, often retaining their own management teams to handle everyday business tasks. This division of labor allows the parent company to benefit from the performance of its subsidiaries without the need to manage operations.

A well-known holding company is Berkshire Hathaway Inc. (BRK.A), led by the legendary investor Warren Buffett. Berkshire Hathaway has a broad portfolio of businesses, ranging from those in insurance to food and beverage to railroads.

Types of Holding Companies

• Pure holding companies are the simplest to understand because they do just one thing: own and manage other companies. They don’t make anything or sell services themselves; they’re just for running a family of companies.
• Mixed holding companies combine ownership of other companies with their own operational activities. For instance, Microsoft Corporation (MSFT) acts as an operating company producing software and services while holding significant ownership stakes and controlling interests in other technology companies.
• Immediate holding companies are like a direct parent. They own another company directly, with no middle management involved.
• Intermediate holding companies serve as middle-tier entities within larger corporate structures. Multinational organizations often use this structure to save on taxes and manage regional operations. Intermediates thus own local subsidiaries while being owned by a parent company.
• Industry-specific holding companies focus on one industry they know well. For instance, in the media and entertainment sector, Comcast Corporation is a holding company for NBCUniversal, Xumo, SkyNews, and Telemundo. Financial holding companies, which are regulated differently from others, typically own multiple banking, financial, or insurance institutions.

Holding Companies vs. Conglomerates

A holding company is primarily a legal and financial structure that owns controlling interests in other companies, while a conglomerate typically implies operational involvement across diverse business lines. Many holding companies are conglomerates, but not all conglomerates organize themselves as pure holding companies. 

Holding Company Advantages and Disadvantages

Advantages

The holding company structure offers several unique advantages. First, it helps isolate risk, as each subsidiary has a separate legal status. If one company faces financial difficulties or legal challenges, the other subsidiaries and the parent company remain protected.

There are also major tax advantages to being a holding company. If one business loses money while another makes money, they can balance each other out, which usually means paying less in taxes overall. Let’s say a holding company owns two businesses: a profitable restaurant chain and a new tech startup that’s losing money while it gets off the ground. When tax time comes, it can use the startup’s losses to reduce the taxes it would owe on the restaurant’s profits.

A holding company can also redirect profits from cash-rich subsidiaries to fund growth opportunities in other units or acquire new businesses, which is less costly than obtaining outside funding.

In addition, holding companies might be able to negotiate better terms with suppliers or lenders by leveraging their combined size and resources.

Disadvantages

One of the biggest headaches holding companies face is what Wall Street calls the “conglomerate discount.” In plain English, this means investors often value holding companies less than they would if all their separate businesses stood alone. Researchers have suggested several reasons for this proven phenomenon:

• Money ends up in the wrong places: When a holding company has lots of different businesses, it’s like having several bank accounts but not being able to move money among them quickly enough. Maybe the furniture business needs cash right now to buy new equipment, but most of the company’s money is tied up in the tech division. Even though the furniture purchase could bring great returns, the chance gets missed.
• Jack of all trades, master of none: The executives at the top might be great at running one type of business, but they probably aren’t experts in every industry they oversee. Outsiders are often left wondering how a company can be equally good at running a candy company, an insurance firm, and a railroad, for example.
• It’s just too complicated: Keeping track of how well each business is doing and ensuring they’re all running at their best is like trying to watch 10 TV shows at once. Sometimes, important details get missed because there’s just too much to monitor.

Regulatory compliance also becomes more complex, particularly for companies operating across multiple jurisdictions and industries. There might also be conflicts of interest between the holding company’s objectives and individual subsidiaries, for which there might be other shareholders.

The Bottom Line

By owning a controlling stake in various subsidiaries, holding companies can segment risk while benefiting from diversified revenue streams. Whether structured as pure or mixed holding companies, this corporate approach offers both significant advantages and inherent challenges.

The success of prominent holding companies like Berkshire Hathaway and Alphabet, among others, means they’re not going away anytime soon.