Investment holding companies have some significant differences compared with operating companies. Operating companies sell products or services with a profit margin that leads to revenue. When revenue increases, the value for shareholder does as well. This can also happen by improving operational efficiencies or limiting expenses.
By contrast, investment holding companies do not sell any products or services. This means that the stated net profit for this type of company may not always reflect the financial soundness and cash flows of it, something which would be the case for an operating company. The differences in the net profit across varying reporting periods may also not indicate anything about dividend trends received by shareholders.
Essentially, the value that an investment holding company creates for its shareholders depends more on the performance as well as the value of any underlying investments, not its activities.
General Functionality of Investment Holding Companies
It is very common for the big-name corporations and companies to actually be holding company. These holding companies typically act like parent companies, limited partnerships, or LLCs. They make sure to own sufficient stock to ensure voting control for the company’s management and policies.
In this case, the holding company owns the business. The investment holding company can also own a range of other assets. These may include things like trademarks, copyrights, patents, trade and brand names, bonds, real estate, hedge funds, stock from other corporations, other partnerships that are limited or LLCs, equity funds of a private nature, and more. Essentially, the purpose of a holding company is holding investments.
Holding companies may exist solely for the ownership of specific asset types. Or it can exist to own a range of asset types. One example of a large company that is actually a holding company is Johnson & Johnson. This holding company has the majority ownership stake for more than 265 different companies, all of which focus on pharmaceuticals, medical devices, or consumer health care.
Most investment holding companies are created with one of two goals: managing risk for a bigger corporation or offering a vehicle that investors can use.
The term wholly-owned subsidiaries refers to businesses that a certain holding company fully owns. This situation means that the given holding company can hire management for the company or even terminate it. In turn, those managers control the company’s operations. The holding companies will not participate in daily business operations for companies that they own. Even so, it should understand those operations so it can evaluate prospects and performance.
From an investment perspective, investment holding companies will receive profit from things such as dividends from the investee companies, profit (and loss) from investment realizations, interest on cash, corporate net costs, foreign exchange transactions for foreign cash, and taxes paid.
Investment holding companies place a strong emphasis on controlling treasury risks and managing cash. This is essential due to the goal of investment combined with the large sums of held cash.
Shareholders receive dividends from interest and dividend income that the holding company earns. Holding companies typically aim to give shareholders annual dividend flows of a consistent nature to protect against inflation.
Investment holding companies act as the parent company. This holding company supports subsidiaries by the ability to reduce capital costs via power and strength. This can be done by issuing stock at rates that are rock bottom or lending money with rates that are much better than those commonly available.
Those who wish to form investment holding companies will typically find it simpler to do so with legal assistance. A knowledgeable lawyer can also help clarify the various aspects of an investment holding company to confirm this solution makes sense in your situation.