How does a Holding Company model impact its operations?

Leading cab-hailing app, Ola is all set to revamp its organisational structure. The startup is quite likely to follow the footsteps of Flipkart and go for a holding company structure. According to the new structure:

  • Ola will now have a holding structure and there will be different companies under it.
  • The company will now have cab hailing service, food delivery app, and its upcoming electric vehicles arm
  • Each of these businesses would be running independently by a different business head.

Doesn’t it look like a lot of complication has been eased out? Apparently, yes. The structural overhaul looks a lot more professional and a well thought of the move. A startup when aiming at scaling up its business mostly takes this as an obvious step. More importantly, for a firm involved in multiple businesses, this move definitely aims at better management. Apart from better management, the holding company structure also facilities better valuation and healthy financials.

Example of Holding Company Structure-Flipkart

the structure

                                                                                        Source: Livemint

Let us take a look at how a holding structure can be beneficial for a company

  • Back-end synergies

We know that a holding company structure leads to better management and autonomy. Along with this, a holding company structure thrives on synergies between its subsidiaries. The main purpose of the acquisitions of smaller businesses is to create a combined value. To enhance the potential success of these deals, it is imperative that the company operates under a formal structure with an established hierarchy in place.

  • Facilitates faster decision making and improved deliverables

Shuffling the company’s current structure and establishing a Holding company leads to more efficient decision making. Each unit operates under a business head and he is individually responsible for conducting the happenings there. Major decisions don’t have to wait for the nod of the group CEO and the Managing head of the particular business unit can exercise his autonomy. The faster decision reduces the likelihood of bottlenecks and there is a smoother delivery of products or services.

  • Attractive bet for IPOs

Experts say that holding companies quote at a discount, mainly during the bull run. A major reason for this discounted valuation is its diversified portfolio. It is quite likely that all the subsidiaries of the holding company do not perform well, so the non-performers many a time pull the valuations down. This kind of valuation makes it attractive for investors in the primary market. Though investors must look at a holistic picture while buying the shares and not just the valuation.

  • Stocks are less volatile

Stocks of Holding companies’ are comparatively less volatile owing to their high promoter holding and restricted trading in the market. So investors looking for stability many a time opt for holding company stocks.

  • Increased creation of conglomerates:

Holding companies are known to engage a lot in M&A activities. This is mainly due to three key reasons. Firstly, to expand their footprints in additional geographies, drive revenue growth and rope in employees with exclusive skills. The fact that it holds the shares of many subsidiaries shows its interest towards being a well-diversified conglomerate.

  • Tax advantages:

Holding company structure facilitates better tax planning and simplified tax structuring. Through this structure, businesses can take advantage of creating independent entities and availing tax break until the business is profitable.

  • Succession planning

A holding company upholds the Going Concern way of conducting business. The structure ensures the continuity of business, irrespective of any eventualities. Any event such as a death of key personnel, separation from a founder, closure of one business etc. doesn’t act as a deterrent to the established existence of the company.

On the flipside

While there are many advantages of corporate restructuring, it comes with its own share of drawbacks as well.

Since Holding companies have a certain degree of financial flexibility, there can be an increased occurrence of reckless investments. Usually, Holding companies take debt and invest it as equity into other business, thus expanding the umbrella. However, sometimes the company may be tempted by this and invest in companies with which it has no synergies. This may also impact the core business in the long run.

On the other, in an attempt to always hold profitable units, the Parent company can order for the liquidation of business units at the first signs of trouble. There may be no endeavour at finding solutions and fixing the problem as the Parent company might have to go through losses and stagnation during that phase.

Conclusion: It is all about appropriate design and thoughtful implementation

The restructuring has to be done keeping the focus on bigger goals and scale of the organisation. Otherwise, poor implementation and change of guards in key business units can lead to a lot of confusion among employees, investors and power struggles in the management. This can also hamper the image of the company amongst customers. If the holding company structure or restructuring the company’s organisation set up is designed appropriately and thoughtfully implemented, it only leads the company on the path of operational efficiency.