A holding company is a conglomerate corporation formed for the purpose of holding a controlling interest in several companies. The holding company form enables a corporation to diversify its investments, manage other firms, and contribute to the growth of companies in different business sectors. Although there are many advantages to the holding company form, there are also disadvantages for management, its subsidiaries and investors.
Disadvantages for Management
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Managers face several challenges with a holding company form of organization. Since the holding company likely has a controlling interest in several corporations, management may have limited knowledge in the industry, operations and investment decisions of the controlled company. Such limitations may result in ineffective decision-making. New management may be less equipped to tackle the challenges of the company’s day-to-day operations and respond to competition and market conditions.
Disadvantages for Subsidiaries
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The newly owned subsidiary of a holding company also faces challenges with a change of control. With a new reporting structure in place, former management reports to a larger shareholder and new board of directors while continuing to manage with the best interests of the subsidiary’s shareholders in mind. Therefore, competing interests between management may result in contention and poor decision-making, which can negatively affect share prices.
Disadvantages for Shareholders
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Minority shareholders may also face challenges with a holding company form of organization. While the holding company pays taxes on profits from its subsidiary companies, shareholders pay taxes on dividends received from the holding company. Shareholders may also disagree with the new management’s approach and decision-making. Also, with a new controlling shareholder, minority shareholders must pay more to maintain their previous shareholding and replace the directors. This change of control may cause contention between the shareholders and the holding company.
Other Disadvantages
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The holding company form of organization also faces liquidity issues. Since the conglomerate owns a controlling interest in many corporations, in a highly volatile market or market crisis, the holding company may find it difficult to remain profitable, solvent, or convert its assets in a timely manner to avoid substantial losses. Additionally, many of the holding company’s investments may have unprofitable assets or business lines. If the holding company engages in similar industry sectors, management may face systemic risk, or conversely if the company is engaged in different industry sectors, the holding company may fall susceptible to several volatile market changes that make it difficult to mitigate risk. This can result in residual losses that the holding company may not have envisioned before purchasing the corporations.
