- Method advantages
- Creation process in Russia
- Type and nature holding classification
- Types of corporations after mergers or acquisitions
- Benefits of vertical mergers
- What problems may arise after merging into a holding
In today’s marketplace, it takes a lot of effort for business leaders to remove barriers for cross-border business. Regular enterprises development requires quick and thoughtful decisions of the founders. One of the ways to expand activities available for private entrepreneurs and state-owned enterprises is to create a holding.
A holding is a large corporation that regulates the activities of several independent companies. In other words, a holding is a structure in which one organization is at the head and regulates small business activities.
The purpose of the holding establishment is to increase economic efficiency of the merged enterprises commercial activities.
After a successful merger the parent company has the following tasks:
- a unified development concept design.
- investment strategy development;
- company reorganization;
- financing for investment;
- foreign economic activity implementation.
Companies included in the association may be in different regions.
A holding is an association of several legal entities related to each other by similar activities. This type of transaction is popular in the CIS countries, as it has many advantages. The following is available for the merged firms:
- expanded areas of activities;
- expansion into new sales markets.
- available resources increase;
- improved quality of manufactured products.
- enhanced competitiveness.
The following outcomes are also beneficial for the combined companies:
- Equal risks distribution.
- Tax and finance planning improvement.
- Division and limitation of liability for subsidiaries debts.
- Sales market reputation improvement.
The main advantage of a vertical merger is cost savings, while a horizontal one is higher market shares.
It should be noted that in 2022 restrictions were implemented in Russia on the sale/purchase of shares in companies by shareholder from unfriendly countries. The Government has approved a list of unfriendly countries, which includes more than 40 states. Process takes more time as usual.
Creation process in Russia
The most common way is to conclude an investment transaction. But the successful conclusion of such a deal is preceded by many procedures that must be followed by each of the companies planning to merge into a holding.
Such procedures include the following steps:
- a counterparty checks on financial and economic stability.
- verification of the ‘integrity’ of the affiliated companies in terms of law compliance and absence of claims from the controlling government bodies.
- preparation and conclusion of an investment opinion directly, considering all the subtleties and identified risks.
But even holding companies can face bankruptcy due to ineffective financial, legal or production structures. Hence the goal of increasing the efficiency of the joint economy, on the contrary, may harm the combined enterprises.
Type and nature holding classification
The organizational structure of the holding may be different depending on the goals pursued and the specifics of the activity. Domestic associations can be divided into several classifications.
By parent company functions holdings could be divided into:
- clean – the parent company is not involved in any production activities and manages solely the subsidiaries.
- mixed – the parent company itself is directly involved in the product production, services provision and, in addition, management functions in relation to subsidiaries.
Large commercial structures are often called trading houses, and they can include both manufacturing and purchasing and sales firms. There are agricultural holdings. Focusing on the method of controlling subsidiaries by the parent company, the holding can be:
In a property association, the main company holds a controlling stake in all subordinate companies. In the contractual one, control and management is carried out under an agreement concluded between the parent company and subsidiaries.
Types of corporations after mergers or acquisitions
Complex holding structures subordinate several subsidiaries. According to the subsidiaries production relationship, the holding can be of two types:
- Integrated. The enterprises of such an association are linked by a chain in production. Each company carries out a specific function in the entire products production. This type is popular in the oil and gas industry.
- Conglomerate. Each organization conducts commercial activities independently of other members.
Having divided the holdings according to the degree of mutual influence, they can be classical and cross. Under classical influence the parent company exercises control functions. This is due to their maximum participation in the authorized capital of subsidiaries. Subsidiaries do not have shares in the parent company or have small stakes. Under cross influence the parent company and subsidiaries own each other’s shares. Therefore, there is a pooling of capital, which makes it easier for the enterprise to access finance.
The availability of varieties allows this type of transaction to be used by thousands of companies around the world.
Benefits of vertical mergers
A holding can be built based on both a vertical merger and a horizontal one. It is also practiced creating diversification models in which enterprises are not connected by trade or production relations.
Vertical mergers are possible when the merging companies are in the supplier-manufacturer role. This means that one company is a supplier of raw materials for another. Moreover, the latter produces products using this raw material. This creation process also implies some advantages.
The vertical merger of two or more legal entities allows to reduce the production cost, thereby increasing manufacturer’s profit and production profitability.
When managing, the following areas are important:
- Financial flows.
- Production and economic activities.
- Sales policy management centralization.
Once management is centralized, common problems can arise that need to be addressed.
What problems may arise after merging into a holding
First of all, it is worth noting the loss of management flexibility, since the holding acquires a ‘clumsy’ structure and decision-making becomes more problematic due to the increased formalities, the observance of which is required by law.
The problem of creating a holding may be the lack of independence of subsidiaries in terms of making management decisions. This is since all issues require agreement with the parent company. The unclear distribution of powers between the head office and the business units that are part of the holding sometimes also causes many management problems. Therefore, it is necessary from the outset to clearly establish in the relevant documents the delineation of functions and responsibilities between these members of the holding.
The problem of inequality between subsidiaries can be solved both by developing a common uniform policy and setting common goals that will encourage businesses to act.