An affiliate firm exists where there is a relationship between two companies when one company owns substantial interest, but less than a majority of the voting stock of another company. An affiliate may also exist when two companies are both subsidiaries of a third company. The affiliate status is determined by the degree of ownership a parent company holds in another company. Ownership is generally less than 50% of the company’s stock, if it is above 50%, the firm will generally be considered a subsidiary. The term, in the mergers and acquisitions filed is not to be confused with its use in online retail. In this case, a company or agent becomes affiliated with another in order to sell its products or services known as affiliate marketing. Amazon is the dominant example of this business model.
A company may become affiliated with another firm for a number of reasons
- gain entry into new markets
- maintain separate brand identities
- raise capital without affecting the parent or other companies
- save on taxes
However, in most cases, affiliates are associates or associated companies. The parent has a minority stake in it but the combined power of all these minority stakes may in effect give the parent firm more power than is simply suggested by the percentage shareholding statistic.
Affiliate Example
The term affiliate refers to companies that are related to each other in some way but are not classed as subsidiaries. Google (GOOG, GOOGL) has a vast number of affiliated companies as does Facebook (FB) which owns Whatsapp and Instagram. Affiliate companies are found throughout the business world. In the corporate securities and capital markets, executive officers, directors, large stockholders, subsidiaries, parent entities, and sister companies are affiliates of other companies.
An affiliate is different from a subsidiary, of which the parent owns more than 50%. In a subsidiary, the parent is a majority shareholder, which gives the parent company’s management and shareholders voting rights. Subsidiary financials may also need to be consolidated into the parent company’s financial sheets. However, subsidiaries remain separate legal entities from the parent firm. This means they are liable for their own taxes, liabilities, and governance.
