When a larger company acquires a smaller one, or creates a new subsidiary, it must decide how cozy it wants to be — both operationally and financially.
For example, Korean chaebols — family-owned conglomerates such as Samsung and Hyundai — often maintain tight management control over subsidiaries while limiting their financial stakes. They invite other entities to invest in a subsidiary and share its profits as well as its financial risk.
Metin Sengul , professor of management at Texas McCombs, wondered why some companies structure themselves this way, with a gap or "wedge" between their control rights and rights to the subsidiary's earnings.
Parent companies intentionally design and tweak this balance "for many different reasons," Sengul says. But in new research, he finds two internal factors that influence those decisions:
- Relatedness: how closely the subsidiary's operations relate to the other businesses the parent operates, such as all being in segments of the auto industry.
