Corporate Structuring
January 4, 2005 5:29 PM   Subscribe

Part of my job involves tracking M&As and hierarchy (parent-child relationships) for global companies. Ultimately, I need to be able to make decisions on how we report our revenue on certain companies. I don't have a business degree and I'm confused over some of what I read. How can I best read up on corporate structure, and anything else related? I'm coming up empty on google.
posted by evening to Work & Money (10 answers total)
You might try the book store.
posted by caddis at 6:19 PM on January 4, 2005

trharlan is right. That is why I suggest the book store. All of those subjects have been covered extensively in books and more thoroughly and authoritatively than in any web site. With a little more info on what you are looking for you might get some web site suggestions. However, as this is for your job and you really want professional advice, I would start with some good books or perhaps take a course. It sounds to me like you are in over your head from the way you phrased your question, but perhaps not depending upon what you really are doing with this information and who the audience will be.
posted by caddis at 7:39 PM on January 4, 2005

I work in tech M&A. This is an accounting question. You want a book on financial statement analysis; you certainly need to know your way around consolidated statements for the "big three": income statement, statement of cash flows, and balance sheet.

Also, 10-Ks (annual reports filed with the SEC) are your best bet for any individual situation. Unfortunately, there's no hard and fast rule or rules for what you're looking to do.

If you want to go a bit more in to depth, ask away here. I'll be at work all night long.
posted by sachinag at 8:50 PM on January 4, 2005

Who Owns Whom.

Also, checkout this list of resources by someone at Slippery Rock U (great name!).
posted by mono blanco at 11:20 PM on January 4, 2005

Response by poster: Background: Part of my job involves taking a list of targeted companies, tracking if any merge, get acquired, etc. and making adjustments. The companies we target are largely on the Forbes 2000 list. So when I go to that list, I need to take off subsidiaries, and have been told to avoid holding companies.

I can do all this, but I'm ready to go the next level and understand more of what I'm looking at. What does it mean when there is a holding company? Why does a parent company that is private have child companies that are public? The companies in China look like they are structured differently, what do I need to look for? Why do some companies have two parent companies? etc.

So, books are fine, I just don't know where to begin. The business section is large and has so many things that I'm not looking for. I didn't know if this is standard topic in some business course that maybe I can find online.

So pointers on what I should be looking for would be great (I don't know if this is accounting or not, frankly). And I'll def. check out what people have linked to.

posted by evening at 4:49 AM on January 5, 2005

Response by poster: oh, and I use D&B, OneSource and the free Hoovers, plus info on company websites to piece everything together. But the D&B db we access is only updated once a month, which is obviously slow for how quickly the market can change.
posted by evening at 5:04 AM on January 5, 2005

A business law text (corporate law as taught to business students as opposed to a law school corporate law treatise) would probably answer most of your questions. You might be able to find an outline related to such a course on-line.
posted by probablysteve at 6:29 AM on January 5, 2005

What does it mean when there is a holding company?
Think of it as one of those Russian dolls where there are smaller dolls inside. The holding company has all of the inside smaller company, and more. This may be done for tax or legal reasons, such as increasing liability shields or to allow for easy shuffling of profits and losses (see News Corp. as an example).

Why does a parent company that is private have child companies that are public?
Certain of a company's assets may be highly valued in the marketplace, or it may be a result of a merger/acquisition, where the parent bought a majority of the outstanding stock. Another interesting question: "what's the deal with tracking stocks, like the old GM/Hughes tracking stock?" The idea is that the tracking stock only represents some of a large company's assets and operations. It's a similar idea.

The companies in China look like they are structured differently, what do I need to look for?
You've got me. Look at The9's prospectus in EDGAR for a nice little chart of an example of how much fun Chinese companies can be.

Why do some companies have two parent companies?
Joint ventures are the usual culprit. Dow Corning - Dow and Corning both owned it.

I know this must be frustrating; it's not intuitive and I don't know of a magic bullet. I do think the best way to do it for any particular company is to read their SEC statements. If you want to email me a particular situation as an example, I'll see what I can explain.
posted by sachinag at 8:38 AM on January 5, 2005

evening, those are all excellent questions and probablysteve gave good responses, but let me take a crack at it too.

The key thing to remember, for all your questions above, is that the vast majority of companies are limited liability corporations. A limited liability corporation is responsible for its own debts & obligations. Its owners aren't. If it goes bankrupt, gets sued, or otherwise runs into serious trouble, all the owners can lose is the ownership of the company, nothing else. If you set up an ice skating rink called Evening Skate as a limited liability corporation with $10,000 of your own money, then if Evening Skate borrows $100,000, can't pay it back, and goes bankrupt, you lose only $10,000. Too bad for the bank that lent Evening Skate the money. It owns the rink but can't go after you. If a ballet dancer broke his leg skating at Evening Skate and sued the rink for a kajillion dollars, that's Evening Skate's problem. So, whenever you are wondering why a corporation sets up swarm of subsidiaries, or why there's a holding company, always ask this question: What are they trying to protect? It's the financial equivalent of cherche la femme.

What does it mean when there is a holding company?
A holding company is the ultimate parent, owning or controlling a bunch of companies and their subsidiaries, and subs of those subs, all the way down. The interesting thing about a holding company is that, often, it owns few tangible assets, little you can slap your palm against. Most of its assets are nothing more than the ownership it has in the companies below it. If you look at the balance sheet of a holding company on a stand-alone rather than consolidated basis, for assets you will see items such as "shares and ownership interests in subsidiaries", "loans to subsidiaries" and the like. It is often the holding company that is the listed vehicle. For example, it is Citigroup Inc, a Delaware-incorporated holding company, not Citibank that's listed on the New York Stock Exchange.

A holding corporation serves many functions. Because it has limited liability, it is shielded to a certain extent from problems in the subsidiaries. More importantly, limited liability shields subsidiary A from problems in subsidiary B while the same owners can own both via a holding company. The holding company might be able to convince banks to lend to it at the holding company level, downstreaming the loan proceeds as debt or equity into subsidiaries, thereby preventing the banks from grabbing assets if the loan can't be repaid. There may be all sorts of tax reasons as well. The holding company could be legally located in Bermuda with its favorable tax regime but have all its assets elsewhere. Finally a holding company, on a consolidated basis, is the best way of looking at the entire company as one economic unit. Consolidated financial statements at the holding company level include all the assets of the subsidiaries, netting out cross-holdings, so it's the best way of trying to make a one-to-one correspondence between the financial statements and the economic reality.

Why does a parent company that is private have child companies that are public?
It's a great way for a holding company to raise oodles of cash while retaining control of the listed vehicle. Publicly listed subsidiaries are still part-owned by the holding company, sometimes up to 90%. If the stock price of the sub is doing fantastically well, the holding company can sell down a bit of its ownership in the sub, still control the sub, and suck up millions of dollars. Lather, rinse, repeat.

The companies in China look like they are structured differently, what do I need to look for?
Chinese companies aren't really structured differently from a legal point of view. Most of them, these days, are technically "limited by shares", i.e., limited liability corporations. However, most of them are either majority or 100% owned by the government. The Chinese government is extremely adept at shielding itself from liability. If one of its banks or corporations can't repay loans or gets sued, the government can and does stand behind the shield of limited liability even if it owns 100%. But when the company is doing well, banks are eager to lend to it and (if it is publicly listed) investors are eager to buy its shares, due to the presumption (although not the obligation) of government support.

Why do some companies have two parent companies?
Yes, as probablysteve notes, that's a joint venture. The main purpose is so that the two parents can share the hoped-for profits from the JV while reducing the amount of money they each have to pour into it. And bad joint ventures can have all the problems individuals can have when they cooperate poorly on a project: Misunderstandings, struggle for control, fundamental differences in opinion, mutual suspicion. Joint ventures can be 50/50, 20/80, or any other proportion. 50/50 is the hardest since no one's in control. If it's 20/80, then the 80% owner calls the shots and the 20% owner is just along for the ride. Usually, the two parents will set up wholly owned SPVs ("Special Purpose Vehicles"), shell companies, which are the legal owners of the joint venture share, again for purposes of limited liability.

All the above of course just scratches the surface. There can be holding companies of holding companies. There can be joint ventures which are publicly listed, and so on and so on ad infinitum. There are cases where courts "pierce the corporate veil" and hold owners liable despite the shield of limited liability. Banks generally won't lend to a start-up corporation without a guarantee from the owner, and all sorts of other caveats. Still, it's a beginning. Whatever your political stance or moral view, it's helpful to understand how the corporate world works.
posted by mono blanco at 7:45 PM on January 5, 2005

Response by poster: thanks, all. I took yesterday to mull it all over.

probablysteve - that is the kind of info I needed to help focus my search. while I came up empty in that realm, I was able to find a few books that may or may not be helpful, but are closer than I've come on my own.

mono blanco & sachinag - thanks for the answers to those questions. after reading that, I realize that the answers I seek may not answer my questions (did that make sense?).

At the same time, I think you've shown me I do need to learn how to look at financial statements, as that seems to be the only way to really determine ownership. And my curiosity about other situations will probably have to remain curiosity.

FYI, the there are 2 examples of dual parents I've run into (minus JVs): BHP Billiton (UK & Australia) and Unilever (UK & Netherlands?). BHP is due to a merger, so I kind of get that (just don't understand logistically), but Unilever merged in the 30s.

Also, Bank of China is the Chinese company I've been trying to figure out. I've gotten conflicting (maybe) information as to the type of company (state-owned, joint stock) and appears to be private. Then BOC Hong Kong is a subsidiary that is public. But Forbes 2000 list shows them both on the list, so that was confusing. Then there are the Samsung companies in Korea, that can be difficult to tell who is really the parent. This goes back to learning the financial statements to understand, so as I'm typing this I see what direction I need to go in.

sachinag - FYI, there is no email in your profile, but thanks for the offer.

So, thanks everyone. You've helped me figure out what I need to do.
posted by evening at 5:18 AM on January 6, 2005

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