What is a holding company?

Source: Financial Gleaner, September 15, 2000

WHEN Guardian Holdings Limited becomes listed on the Jamaica Stock Exchange on September 20, it will join the ranks of almost 40 per cent of the existing listed companies, which are also holding companies.

A holding company owns most or all of the voting stock of another company. Companies so owned are referred to as subsidiaries. A wholly owned subsidiary is one in which 100 per cent of the voting stock is owned by the parent or holding company. When less than controlling interest is owned, such companies are usually referred to as associated companies.

In the case of Guardian, for example, Guardian Life of the Caribbean, Guardian Properties Ltd., Guardian Life Ltd., and Bancassurance Caribbean Ltd. are wholly owned subsidiaries. NEM (West Indies) Insurance Ltd., Neal & Massy Holdings and RBTT Financial Holdings Ltd. are associated companies.

Last year, with about 37 majority or wholly-owned subsidiaries and 15 associated companies, Grace, Kennedy & Company was by far the largest holding company listed on the JSE in terms of the number companies in the Group. This was followed by Jamaica Producers Group Ltd., with 27 subsidiaries and three affiliates; the NCB Group Ltd., with 22 subsidiaries and two affiliates; and then, Pan Jamaican Investment Trust Company Ltd., with 20 subsidiaries and four affiliates. The top five in terms of the number of subsidiaries and affiliates were rounded out by Lascelles de Mercado & Company Ltd., with 13 and three, respectively.

Worldwide and within the last decade or so, the fastest growing trend in the creation of holding companies has been within financial and utility companies. Within financial companies, this has been seen as a response to the increasing demands of borderless competition and the need for banks, insurance companies and security houses to offer an increasingly comprehensive and varied array of financial products and services to their customers. So much so in the United States that legislation has been introduced to eliminate the non-affiliation provisions that separated banking from the other financial service providers.

Types and impact of holding companies

There are three basic types of holding companies:

* A pure holding company that is non-operating and exists solely to invest in and hold the voting shares of its subsidiaries. This type of holding company derives its income from the dividends earned from its ownership of the shares of its subsidiaries and from any gains realised from other investments.

* A general or operating holding company that earns its income from selling goods and services in addition to the income derived from its ownership of subsidiaries.

* A pyramid holding company that owns controlling interest in its subsidiaries with less invested capital than the two other categories.

According to a study conducted by a concern that calls itself, Money Harvest in 1998, holding companies first emerged around 1830 among the railroad companies and then later, between 1860 and 1880, among the telegraph and telephone companies - Western Union and the American Bell Telephone, the predecessor of AT & T.

The reason is clear. They needed to operate across borders and they needed size to do it. The need for size is still the motivating reason today and according to the authors of the same study, "the holding company is the most effective device ever invented for combining under a single control and management, the properties of two or more hitherto independent corporations."

Unlike a merger, in which a company absorbs another and the target company ceases to exist legally, subsidiaries within a holding company group retain their separate legal identities with their own directors, management and so on. However, the parent or holding company does exert influence on their subsidiaries' operations and path to reaching or increasing profitability.

That is one of the central motives for forming holding companies: to grow companies through increased profits and shareholder value by acquiring other profitable businesses - or businesses that can be made to be so.

It seems to work. Last year, for example, the top ten of the Fortune 500 companies, General Motors, Ford Motor, Wal-Mart, Exxon, General Electric, IBM, Citigroup, Phillip Morris, Boeing and AT&T, are all holding companies.

The picture is the same in our own market. Eleven of the top twenty listed companies in 1999 in terms of revenues, pre and post-tax profits, market capitalisation and share trading activity, are holding companies: BNS, Carreras, CIBC W.I. Holdings, D&G Ltd., the Gleaner Company, Grace Kennedy & Company, Jamaica Producers Group, Lascelles de Mercado, Pan Jam, Seprod and the NCB Group.

Regulation of a holding company is not substantially different than a non-holding company in Jamaica, according to JSE general manager Wain Iton. He pointed to JSE Rule 407A which specifically relates to holding companies within the meaning of the Companies Act, 1965. The only significant difference is that a holding company must report on the operations of the entire Group.

In so far as the Securities Commission is concerned, executive director Earl Melhado said that his agency requires and will vigorously enforce, "arms length dealing between related companies at all times". "Our biggest difficulties arose within our financial sector when companies that were allegedly insulated from each other in subsidiary groupings, did things that contaminated each other," he said.

* This column is part of the on-going public education programme of the Council of the Jamaica Stock Exchange.