Subsidiary vs. Affiliate: An Overview
A business entity can be an affiliate, an associate, or a subsidiary of a parent company depending on its level of ownership. The terms affiliate and associate are often used synonymously to describe a business with a parent company that possesses a stake of between 20% and 50% ownership. Aminority stake is an ownership or interest of less than 50%.
Asubsidiaryis a business whose parent company holds a majority stake. It's a majority shareholderof 50% or more of all shares. Some subsidiaries are wholly owned. The parent corporation owns 100% of the subsidiary.
As a majority shareholder, the parent company owns enough of the subsidiary to exercise majority control over it, making decisions such as appointing the board of directors or other important business transactions.
Key Takeaways
- Asubsidiaryis a company whose parent company is a majority shareholder owning more than 50% of all the subsidiary company's shares.
- An affiliate describes a company with a parent company that possesses 20% to 50% ownership of the affiliate.
- Companies create subsidiaries and affiliates rather than mergers and acquisitions in host countries in many cases of foreign direct investment (FDI) to prevent any negative stigma associated with foreign ownership or negative opinion associated with being owned by a controversial parent company.
- Owning an affiliate or subsidiary can allow a company to extend its market share into parts of the world to which it otherwise wouldn't have access.
An Example: Disney
Disney-ABC Television Group, a unit of The Walt Disney Company (DIS), is involved in a joint venture with Hearst Communications, a private company. It's called A+E Networks, an American broadcasting company.
The Walt Disney Company also owns an 80% stake in ESPN, an American multinational basic cable sports channel. Heart Communications owns the remaining 20% stake. The Walt Disney Company also owns a 100% interest in the Disney Channel. A+E Networks,which is independently run, is an affiliate company in this scenario. ESPN is a subsidiary and the Disney Channel is a wholly-owned subsidiary company.
A joint venture is one where both companies own 50%. Disney and Hearst Communications both hold exactly 50% which is not enough to establish the control necessary for a subsidiary.
Subsidiaries
A subsidiary typically becomes part of a parent company to provide the parent company with specific synergies such as increased tax benefits, reduced regulation, diversified risk, or assets in the form of earnings, equipment, or property. Companies usually take ownership of subsidiaries to extend the range of their products and services beyond what would be expected from the parent company’s brand.
The purchase of an interest in a subsidiary differs from amerger because the parent company can acquire a controlling interest with a smaller investment.
Affiliates
An investment in an associate or affiliate company is one in which the acquiring company owns between 20 and 50% of the shares. This ownership implies "significant influence," the accounting term that states that a company should be accounted for under the equity method of accounting. This is in contrast with a subsidiary where control is established and consolidation accounting is undertaken.
How Foreign Ownership Is Handled
Companies create subsidiaries and affiliates in host countries in many cases of foreign direct investment (FDI) to prevent any negative stigma associated with foreign ownership or negative opinion associated with being owned by a controversial parent company.
FDI generally occurs when a company acquires foreign business assets in a foreign company. Owning an affiliate or subsidiary in this way can allow a company to extend its market share into parts of the world to which it otherwise wouldn't have access.
Affiliate and subsidiary banks are the most popular arrangements for foreign market entry in the banking industry. These banks must follow the host country's banking regulations but this type of corporate structure allows these banking offices to underwrite securities.
Bank of America still generates the majority of its revenue in its domestic market in the U.S. but its acquisition of Merrill Lynch allowed it to establish international operations. London-based Merrill Lynch Internationalis one of Bank of America's(BAC) largest operating subsidiaries outside the U.S. Merrill Lynch Internationalserves customers worldwide and offers wealth management, research, analysis, fixed income, investment strategies, financial planning, and advisory services.
Special Considerations
Subsidiaries are distinct legal entities for liability,taxation, and regulation purposes but parent companies are required to combine the financial statements of their subsidiaries with their own financial statements.
What Is an Example of a Company With Subsidiaries?
Berkshire Hathaway Inc. is a good example of a company with several subsidiaries. They include Business Wire, Clayton Homes, Duracell, GEICO Auto Insurance, Helzberg Diamonds, International Dairy Queen, Inc., and See's Candies.
What Is an Example of Affiliated Companies?
Bank of America Corporation has a list of affiliated companies including U.S. Trust, Merrill Lynch, First Franklin Financial, and Balboa Insurance Company.
What Are Sister Companies?
Sister companies are subsidiaries that are owned by the same parent company. Fox News and Britain's Sky News are sister companies owned by the same parent company, 21st Century Fox.
The Bottom Line
The difference between an affiliate and a subsidiary is established by the degree of relationship they keep with their parent company. An affiliate is a business with a parent company that only possesses a stake of less than 50% ownership of the company. A subsidiary is a business whose parent company is a majority shareholder. It owns 50% or more of the subsidiary company.
Subsidiaries are separate legal entities from their parents. They're therefore liable for their own taxes, liabilities, and governance.
