11/17/2009
Defining affiliate, associate and subsidiary companies
We are often asked to explain the differences between affiliate, associate and subsidiary companies. All three of these terms refer to the degree of ownership that a parent company holds in another company. In most cases the terms affiliate and associate are used synonymously to describe a company whose parent possesses only a minority stake in the ownership of the company.
A subsidiary, on the other hand, is a company whose parent is a majority shareholder. In a wholly owned subsidiary the parent company owns 100% of the subsidiary. For example, the Walt Disney Corporation owns about a 40% stake in the History Channel, an 80% stake in ESPN and a 100% interest in the Disney Channel. In this case the History Channel is an affiliate company, ESPN is a subsidiary and the Disney Channel is a wholly owned subsidiary company.
In many cases of foreign direct investment, companies create subsidiaries and affiliates in host countries in order to prevent any negative stigma associated with foreign ownership or negative opinion associated with being owned by a controversial parent company.
In the banking industry, affiliate and subsidiary banks are the most popular set-ups for foreign-market entry. Although affiliate and subsidiary banks must follow the host country’s banking regulations, these styles of banking offices allow banks to underwrite securities.
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