What is a subsidiary in business?

Parent companies can come in the form of conglomerates, these are business entities that are made of a number of different, and sometimes seemingly unrelated businesses. A great example of this type of parent company is General Electric (GE). GE's business units are diverse and are able to benefit from cross-branding. GE owns a number of subsidiaries.

Parent companies and their subsidiaries can also be organized in different ways. Here are the two ways parent companies can be organized in reference to their subsidiaries:

• Horizontal integration

Parent companies can be horizontally integrated. An example of horizontal integration of a parent company is Gap Inc., which owns Banana Republic and Old Navy as subsidiaries.

• Vertical integration

Parent companies may also be vertically integrated. This is the case when a parent company owns several different subsidiaries at different levels of the production and supply chain.

For example, ATT acquired Time Warner, and this meant that Time Warner became the subsidiary of ATT, and ATT became the parent company of both the film production and TV broadcast side of Time Warner, in addition to its own telecommunications networks that gave the media its infrastructure.

• Ways a company becomes a subsidiary

The two most common ways a company becomes a subsidiary are through acquisitions when parent companies or corporations buy off other smaller companies, or through spin-offs. Larger companies often seek to acquire smaller entities as subsidiaries and to eliminate competition in a specific market.