Chapter 42
FINANCIAL MANAGEMENT : Choice of corporate structure
The organisation of a group evolves over time according to its strategy and constraints. If simplicity and legibility are the key to an accurate valuation, it may happen that the group strays from this line for a more or less lengthy period of time.
Diversification of activities is more frequent in groups controlled by a single shareholder, who thus reduces their risk, than for a listed company without a controlling shareholder, for which there is strong pressure from investors to avoid diversifying, as they have little appreciation for diversification that they can achieve themselves on their own terms. Failing this, the holding discount is the penalty.
A stock market listing allows shareholders to achieve a certain liquidity for their investment in the company. However, this liquidity is only real for large companies or only at the time of the IPO for smaller companies. For the company, an IPO provides access to new sources of financing, enhances its reputation and can create financial interest for its managers and employees in the improvement of its value. However, it implies having a strategy linked to financial parameters.
Opening up the capital of subsidiaries to minority shareholders provides leverage to raise funds, enables the value of an asset to be externalised and whilst facilitating external growth, can prepare for a phased divestment, reduces the weighting of an asset in the group’s results, allows the subsidiary to take more risks, gain a partner offering synergies, and motivates the subsidiary’s employees. If it is used too frequently, the company runs the risk of becoming a holding company with the discount that goes with it.
Being a minority shareholder in another company is most often an option for a non-financial group for future developments, even if from a financial point of view, these holdings are often poorly valued because they are not well known and identified by investors.
It is a good principle of financial management that the parent company of a group should be the one that takes on debt in order to lend to its subsidiaries and that net debt at its level should be as low as possible in order to maintain financial flexibility.
For a long time, international groups have been structured to reduce the tax friction associ- ated with dividends paid by subsidiaries. Transfer pricing, a means of shifting margins around within the group often based on tax considerations, has taken over in group structuring. It is now very much in the hot seat because manipulating it is increasingly poorly viewed by society and is now strictly controlled by governments.