====== Subsidiaries ======
A subsidiary is a company that is owned and controlled by another, larger company, often called the [[parent company]] or [[holding company]]. Think of it like a family tree: the parent company sits at the top, and the subsidiaries are its children. This control is typically established when the parent owns more than 50% of the subsidiary's [[voting stock]], giving it the power to elect the board of directors and steer the company's strategy. While the subsidiary operates as a distinct legal entity with its own assets and liabilities, its financial results are rolled up, or 'consolidated,' into the parent company's overall [[financial statements]]. This structure allows large corporations to organize their diverse operations, manage risks, and expand into new markets or industries. For investors, understanding a company's web of subsidiaries is crucial, as they can house both hidden gems and potential liabilities.
===== Why Do Companies Have Subsidiaries? =====
Corporations aren't just being complicated for the sake of it. Creating subsidiaries is a strategic move that serves several key purposes. It's a way for a corporate giant to be nimble, organized, and protected.
  * **Risk Management:** This is a big one. By creating a subsidiary for a risky new venture or a business line with high potential liability, the parent company can shield itself. If the subsidiary goes bankrupt, creditors generally cannot go after the parent company's assets, thanks to the principle of [[limited liability]].
  * **Brand Identity & Market Focus:** A single corporation can own multiple, competing brands without confusing customers. For example, The Volkswagen Group owns Audi, Porsche, and Lamborghini. Each operates as a distinct subsidiary, targeting a different customer segment with a unique brand identity.
  * **Global Expansion:** Entering a foreign market is complex. Setting up a local subsidiary can make it easier to navigate local laws, taxes, and business cultures. It can also be a more straightforward way to acquire an existing local company.
  * **Operational Efficiency:** Large, diversified companies often use subsidiaries to create clear operational divisions. A tech behemoth might have separate subsidiaries for its cloud computing, hardware, and advertising businesses, each with its own management team focused on its specific goals.
===== The Value Investor's Lens: Peeking into Subsidiaries =====
For a [[value investor]], a company's structure is more than just a chart in the annual report; it's a treasure map. The complex web of subsidiaries can often obscure the true value of a business, creating opportunities for the diligent analyst.
==== Unlocking Hidden Value ====
Sometimes, a fantastic, high-growth business is hidden inside a boring, slow-growing conglomerate. Because its stellar results are blended into the parent's consolidated financials, the market might overlook it entirely. The real detective work for an investor is to dig into the company's filings and identify these high-performing segments.
A common valuation technique here is the [[sum-of-the-parts (SOTP) valuation]]. An investor estimates the value of each subsidiary or business segment as if it were a standalone company and then adds them up. If this "sum-of-the-parts" value is significantly higher than the parent company's current [[market capitalization]], the stock may be undervalued.
Companies themselves sometimes recognize this hidden value and decide to unlock it for shareholders through:
  * **A [[Spin-off]]:** The parent company separates a subsidiary into a brand-new, independent, publicly-traded company, distributing its shares to the parent's existing shareholders.
  * **A [[Carve-out]]:** The parent sells a minority stake of the subsidiary to the public via an [[Initial Public Offering (IPO)]], raising capital while still retaining control.
==== The Pitfalls: What to Watch Out For ====
Of course, where there is treasure, there are also traps. Subsidiaries can be used to make a company's finances look better than they actually are.
  * **Hiding Debt and Losses:** A parent company might shift debt onto a subsidiary's [[balance sheet]] or move a poorly performing operation into a separate entity to make its own financial reports look cleaner. This is a form of [[off-balance-sheet financing]].
  * **Manipulating Profits:** Watch out for [[intercompany transactions]]—the buying, selling, and lending of goods and money between a parent and its subsidiaries. These can be used to shuffle profits around, perhaps to a subsidiary in a low-tax country, or to make one division look more profitable than it really is.
===== Reading the Fine Print: Where to Find Information =====
So, how do you start your treasure hunt? Your primary tool is the company's [[annual report (10-K)]].
  - **Business Segments:** The "Business" section and "Management's Discussion & Analysis" (MD&A) will describe the company's main operating segments, which often correspond to major subsidiaries. The footnotes to the financial statements provide detailed financial data for each segment, such as revenue and operating income.
  - **List of Subsidiaries:** Buried in the "Exhibits" section at the very end of the 10-K, companies must often include a list of their significant subsidiaries. This can reveal the full, and sometimes staggering, complexity of the corporate structure.
By patiently digging through these documents, an investor can begin to piece together the true picture of a company's operations and uncover the value—or risk—hiding in plain sight.