By Nganga Njiinu
If you go into business, whether you are thinking of entering into a new line, expanding the size of your current business or into a new geographies, you need to understand the concept of a holding company structure.
In other instances, you may be approached by other businesses that are interested in buying a controlling stake in your business. It is important to seek sound legal advice on what such an arrangement will mean for your business before making any lasting decision especially as to your company’s place in a broader structure.
Holding companies are becoming more common in the Kenyan market today than they probably were ten years ago. Still, many businesses, especially in the SME sector, believe that they are a preserve of big corporations.
That is not true. To understand how holding companies may be beneficial even for businesses in the SME sector, we need to first understand what a holding company is and how they benefit the businesses under them.
The primary business of a holding company is to hold a controlling stake in the securities of other companies. A holding company by itself does not produce any goods or services. Holding companies may however own property, such as real estate, patents, trademarks, stocks, and other assets that may be beneficial for their subsidiaries.
The companies under a holding company are called subsidiaries. These are either wholly owned by the holding company (wholly owned subsidiaries), or companies in which the holding company has a controlling stake.
While larger corporations can have holding companies with investments in subsidiaries in different sectors, it is usually advisable for smaller companies to concentrate on related sectors so that they can benefit from group synergies and shared technical expertise .
One of the most important roles a holding company does is sourcing capital and strategically deploying it to subsidiaries. Holding companies exist to pool and deploy capital to their subsidiaries, offer strategic management support and to provide platforms for synergies.
The advantage that a holding company has when it comes to capital sourcing and deployment is that it can utilise a diverse pool of options that is not limited to equity capital or credit from banks.
Holding companies focus on mobilizing capital and underlying portfolio holdings with staggered inflows usually gives them access to multiple sources of patient capital, which they can easily deploy to fund mid to long-term strategic projects without having to deal with the strain that comes from commercial loans or other funding sources with short repayment periods.
Additionally, holding companies due to their more active involvement with their subsidiaries are better placed as capital providers because they have a better understanding of the businesses and the business cycles of the subsidiaries and thus can be more supportive and flexible. However, this relationship needs to be managed as underlying businesses can destroy value if relationship is not objective, making return and risk expectation unenforceable.
Often, the holding company may also raise funds to acquire a new business that will complement the activities of the already existing subsidiaries. For example, a holding company that owns an electricity transformers manufacturing company may acquire an electricity conductors manufacturing company to produce conductors for its transformers or to sell as a package to common clients.
In most cases under a holding company structure, the holding company also owns strategic assets like land or buildings which can also be deployed to the subsidiaries to meet strategic objectives and keep value inhouse.
The controlling stake that holding companies have in their subsidiaries allows them to make strategic decisions for the benefit of the individual business units and the holding company. This includes setting up strong corporate governance structures across the subsidiaries. A holding company’s investment in a subsidiary in most cases is usually accompanied by strategic representation at various governance levels for better alignment, quicker decision making and oversight of management. The subsidiaries can benefit from capacity extension from the holding company in instances where specific technical expertise are not available in the subsidiaries.
A holding company has teams with specialized skills and operational expertise to support subsidiary businesses and offer critical support services, in addition to providing strategic direction.
As part of offering strategic management, a holding company may also be directly involved in the decisions relating to recruiting key personnel in the subsidiaries in line with set strategic goals, these includes some C-suite-level personnel.
Additionally, a holding company structure could produce value accretive synergies across its platform from commercial collaborations to infrastructure sharing and skills and expertise in identified areas in a shared services model. The costs of centralized teams could then be shared across various businesses, saving costs and most importantly standardizing key services.
The writer is the Group CEO of TransCentury Group Plc
Comments