Holding companies are an interesting legal construct – they are not operational, so do not provide a product or service – but their business is the ownership of assets. Since the Rockefeller’s pioneering Standard Oil, the holding has revolutionised the way we do business allowing for ownership consolidation and governance, increased portfolio synergies and better profitability in a wider sphere of influence. From a legal perspective, the at-arm’s-length model that defines holding allows for a legal distance from subsidiaries, thus reducing liability and exposure of the holding or mother company. Historically, holding companies used to function in relative secrecy and benefitted from unaccountability when problems arose, which at times made the holding structure controversial. One thing is sure though – the holding is a crucial part of our current business landscape in an increasingly complex and globalised economy.
Loosely defined, a holding company is a corporation, company or partnership whose sole function is to own assets and whose sole source of revenue are these asset’s profits. The assets can be anything with abstract value: the full ownership or controlling stock in one or many companies, real estate, securities, patents, copyrights or any other intellectual property. Holding companies can serve as both investment vehicles and tools for corporations to consolidate their power over diverse portfolios. Many of the largest and best-known companies in the world are structured as or owned at some level by holding companies.
In most Western countries, there are two distinct financial advantages to the holding. Often, companies are subject to reduced taxation and can be seen strategically using jurisdictions with lower rates to set up subsidiaries. This can translate to savings in the millions for larger firms. And, because a holding company
and its subsidiaries are separate legal entities, holding companies are usually insulated from creditors if a subsidiary faces insolvency. In some cases, the owning firm can even benefit from the capital loss or claim damages when a subsidiary goes bankrupt.
The History of the Holding Company: From Trusts to Holding
In the mid-19th century, corporation laws in the United States of America were simplified, making it easier for companies to incorporate. Provisions remained, however, that restricted corporations from owning property or conducting business across state lines and international borders. To sidestep these limitations, the American business magnate John D. Rockefeller formed a trust where he and other trustees managed the controlling interest of a single company in each state. Each company represented a collection of Rockefeller’s holdings in that state. Soon other entrepreneurs followed, creating hundreds of trusts that emulated Rockefeller’s visionary structuring.
The US state of New Jersey took note and drafted legislation allowing for businesses registered in the state to own property in other jurisdictions. The move, meant to entice companies to establish headquarters in New Jersey, worked. The Holding Company Act of 1889 saw a deluge of companies incorporate in the state, with the intent of conducting business nationally. Until today, both trusts and holding companies are in use and business owners take strategic decisions as to which legal construct best benefits their corporate vision. However, compared to trusts, holding companies can exert more control over their assets and trade stocks with greater ease.
Following this first model of New Jersey-based holding companies, other states were quick to pass similar legislation. By the turn of the 20th century, hundreds of holding companies had been established across the US, and the concept was beginning to proliferate in Britain.
Throughout this period, however, holding companies were often subjected to disastrous litigation. Even John D Rockefeller’s Standard Oil Company met its demise in 1911 when the United States Supreme Court ruled it was a monopoly, and thus illegal. Indictments stymied the early progression of holding companies but failed to eradicate them entirely.
The earliest successful North American holding companies focused on transportation and utilities, but when legislation relaxed, the floodgates opened and holding became a diverse phenomenon. For instance, early media conglomerates acting as holding companies were able to control the value chain of their products by both owning the production and distribution of their content. This strategy allowed them to consolidate their influence and grow their market share.
Today, holding companies can be found in most industries and are used for a variety of reasons. For strategic reasons, for example, most advertising agencies have made the transition from purely operational models to holding companies, allowing their subsidiaries to better focus on specific mediums and media outlets. The connections between subsidiaries are another area of potential strategic benefit. Such cross-portfolio connections, however, are not always evident to consumers, thus potentially mitigating consumer bias.
In the world of investment banking, holding companies are ubiquitous. Bank of America, JP Morgan Chase and many others operate as holding companies and do not directly participate in banking or investments. After the financial crisis in 2008, many investment banks made this transition to gain access to funding and limit their liability for the future.
The holding company can be ideal for real estate investments as well. A development on holding companies that own property, Real Estate Investment Trusts can be publically traded like mutual funds. Today, over half of all real estate holding companies are REITs and in the US, REIT’s own over 200,000 properties.
In the Family
Family-owned companies in North America and around the world use holding structures for a variety of strategic, operational, legal and financial reasons. When a family owns several key assets, some operational and others not, a clear holding structure can be extremely beneficial to clarify private ownership and prepare ownership succession.
Some of the largest family-controlled companies are organised in holding groups and have often taken advantage of the structure to grow extensively and diversify into a great variety of sectors.
Hathaway Manufacturing Company was a Massachusetts based cotton-milling business set up by Horatio Hathaway in 1888. In 1955, Hathaway merged with Berkshire Fine Spinning Associates and Berkshire Hathaway was born. Even with annual revenue of over a hundred million, the leadership struggled to navigate the intricacies of managing a corporation. Losses compounded, making room for Warren Buffett, then only 32, to gain controlling shares in a business he felt was undervalued. By 1965, Buffet was the majority shareholder.
To cushion Berkshire Hathaway against the inherent instability of the textile industry, Buffet diversified into insurance, newspapers and banking. By the 1980s, Berkshire Hathaway had further expanded with manufacturing, media and insurance acquisitions. In 1988, Berkshire Hathaway went public on the New York Stock Exchange, and Buffet continued his pattern of making successful investments.
In 2017, Berkshire Hathaway’s revenue was 242 billion. An investment of 1000 dollars in 1965, when Buffet took over, would be worth 16 million dollars today. The conglomerate has a controlling stake in global brands including Duracell, Fruit of the Loom and Dairy Queen.
George Weston Limited
In 1882, Toronto bread salesman George Weston bought his first bread route. Later, he purchased the bakery, and by the turn of the century, he owned Canada’s largest bread business. After George Weston’s death in 1922, his son William Garfield Weston became president and continued his father’s strategy of modernisation and expansion.
George Weston Limited went public in 1928 and internationalised by acquiring bread and biscuit factories in Boston and the UK. Further expansion after World War II saw Weston buy a controlling interest of Loblaw Groceteria, one of Canada’s biggest grocery chains.
The company reorganised in the 70s, and W. Garfield Weston appointed his son, W. Galen Weston as CEO of the Loblaw subsidiary, who turned it into the country’s largest and most profitable grocery chain. By the 80s, George Weston Limited owned or had a controlling stake in companies around the world in a diverse range of industries including real estate, insurance, banking, clothing and even fish processing. Today, these holdings include the brands Associated British Foods, Selfridges and Holt Renfrew with total assets approaching 40 billion dollars.