What is an Affiliated Company?

An affiliated company is a business that is connected to another business. The connection between the two companies can take different forms. One company may own part or all of the other company. Or the two companies may be owned by the same parent company. Companies that are affiliated often work together or help each other out.

Types of Affiliated Companies

There are a few main ways that companies can be affiliated:

Subsidiary

A subsidiary is a company that another company owns. The subsidiary’s company is called the parent company or holding company. The parent company has control over the subsidiary.

For example, Frito-Lay and Gatorade are subsidiary companies of PepsiCo, which is also their parent company and owns them.

The parent company often lets the subsidiary continue doing business under its name. Subsidiaries usually make decisions about day-to-day matters, but the parent company gets the final say in big decisions.

Associate Company

An associate company is one in which another company owns a big chunk, like 20% to 50%. So the other company has a lot of influence but doesn’t have full control like with a subsidiary.

The company that owns the big chunk of the associate company is called the investor or partial parent company. The assistant company is called the investee company.

For instance, Nissan owns 15% of Renault, an associate company of Nissan. Nissan has some say in what Renault does because it’s a major investor, but Renault still mostly runs itself.

Affiliate

An affiliate is a more general term for connected companies. It can refer to associate companies or subsidiaries. It’s a catch-all term for companies with significant ties to each other.

Amazon has a program called “Amazon Associates.” Websites can sign up to be Amazon affiliates. When they send customers to Amazon, and those people buy stuff, the website gets a sale cut. So, it’s affiliated with Amazon’s business.

Why Companies Become Affiliated

There are a bunch of reasons why companies might want to be affiliated with each other:

Shared Resources and Knowledge

Affiliated companies often share resources, information, and expertise, which can help them be more efficient and effective.

Take Pixar and Disney, for example. Both make animated movies. Since they’re affiliated, Pixar can use some of Disney’s technology and equipment, and Disney can learn from Pixar’s creative process. Working together, they can make better movies.

Bigger Market Reach

When companies join forces through affiliation, they can reach more customers. Each company can tap into the other’s customer base. That means more people buying their products or services.

For example, when a small local store becomes a franchise of a big national chain, The small store gets access to all the chain’s loyal customers. And the big chain can reach the local community through the small store. It’s a win-win.

Cost Savings

Affiliated companies can often save money by sharing costs. They might share office space, equipment, or raw materials. Buying in bulk together is usually cheaper than going it alone.

For instance, airlines sometimes form alliances, like Star Alliance or SkyTeam. By teaming up, these airlines can coordinate routes and share airport lounges, which reduces their expenses.

Less Competition

There is less competition when one company buys part or all of another. Instead of fighting for the same customers, they’re on the same team, which can lead to more stability and higher profits.

For example, Facebook bought Instagram in 2012. Instagram was a rising star in photo-sharing apps and could have become a major Facebook competitor. However, by buying Instagram, Facebook neutralized that threat. Now, the two apps complement each other under Facebook’s umbrella.

Risks of Being Affiliated

While there are benefits to affiliation, there are also some potential drawbacks companies should watch out for:

Limited Independence

When companies are affiliated, they give up some of their independence. They have to consider the needs and goals of their affiliate companies, and they can’t just do whatever they want.

Subsidiaries have the least independence. The parent company has the ultimate say. Associate companies have more freedom. But they still have to listen to their investor company.

Spread of Financial Troubles

If one affiliated company has money problems, it can spread to the other companies, as their financial theories are somewhat tied together.

Like during the 2008 financial crisis, some banks had invested in other banks in deep trouble. When those banks failed, it dragged down the investor banks, too.

Guilt by Association

The actions of its affiliates can damage an affiliated company’s reputation. If one company does something shady or unpopular, the public may paint its affiliates with the same brush. Even if the other companies didn’t do anything wrong, the association could taint them.

For instance, remember when United Airlines forcibly removed a passenger from an overbooked plane? The video went viral, and people were outraged. United’s affiliated companies, like United Express, felt the heat, too. Even though they weren’t directly involved, their link to United hurt their image.

Regulating Affiliated Companies

Governments often have special rules for regulating affiliated companies. They want to ensure big corporations don’t use affiliates to cheat the system. Some common regulations include:

Tax Rules

Tax laws often require affiliated companies to price their transactions fairly. They can’t sell things to each other at super-low prices to avoid taxes. They have to use the same prices they would charge an unaffiliated company. This is called an “arms-length” transaction.

Antitrust Laws

Antitrust laws prevent companies from collaborating to stifle competition. Regulators may block a big company from buying too many competitors as they don’t want it to become a monopoly.

Microsoft encountered this problem in the 1990s. Regulators thought it was using its operating system dominance to squeeze out competing software. To level the playing field, Microsoft had to unbundle some programs from Windows.

Disclosure Rules

In many countries, companies must disclose their affiliations to the public. This is especially true for publicly traded companies, which must report their major subsidiaries and associates. Investors have a right to know how a company is connected to others.

Final Thoughts

Affiliated companies are a common feature of the modern business world. Companies often find collaborating with others through ownership stakes or close partnerships advantageous. It can lead to shared resources, bigger markets, lower costs, and less competition.

However, affiliation also comes with risks, like loss of independence, financial contagion, and reputation damage. That’s why laws regulate affiliated company behavior in areas like taxes, antitrust, and disclosure.

Companies must weigh the pros and cons when deciding whether to seek out or expand affiliations. The right affiliation strategy depends on each company’s unique circumstances and goals.