Offices of holding companies, not elsewhere classified, include firms that primarily hold or own securities of other companies to exercise control over the activities of those organizations. This industry classification excludes bank holding companies, but includes investment, personal, and public utility holding companies. Corporations that operate the entities whose securities they hold are classified in their respective industry.
551112 (Offices of Other Holding Companies)
Holding companies have several functions. They may be used to achieve financing goals or to circumvent certain federal or state regulations. Most often, however, a holding company allows a corporation to achieve economies of scale as well as geographic or market diversification. The holding company also allows a corporation, through its subsidiaries, to integrate both horizontally and vertically. For instance, an automaker may vertically integrate by buying a steel mill that can make steel for its cars without a mark-up in price. The same automaker might also integrate horizontally by acquiring or merging with another automaker, thereby providing new manufacturing technologies, a broader market, or complimentary product lines.
The first U.S. holding companies were in New Jersey, after that state passed the New Jersey Holding Company Act. This allowed corporations to bring previously independent firms under unified control. Holding companies were an alternative to trust organizations, which often allowed monopolies to form. Although the goal of the Public Utility Holding Company Act of 1935 was also passed to prevent such monopolies in the electric power industry, electric companies serving a group of states or a single state still operated in such a manner.
The New Jersey Act generated so much tax revenue that other states soon followed its lead. The rise of holding companies allowed many corporations to reach national markets. Intense U.S. merger activity occurred periodically, from 1898 to 1902, during the 1920s, from 1951 to 1955, in the 1960s, and during the mid 1980s.
Mergers and acquisitions fell during the late 1980s and early 1990s, as heavy debt, the late 1980s recession, and a lack of capital slowed holding company growth. Furthermore, many industries dominated by large holding companies had lackluster revenues in the early 1990s.
By the end of the 1990s, however, mergers and acquisitions were on the rise, especially in the public utilities area, as electric and natural gas companies merged. The percent of utilities that owned natural gas distribution companies increased from 40 percent to 55 percent by the end of 1998. Since then, 11 mergers have united companies involved predominantly in electricity with natural gas companies. For instance, SCANA Corporation of Columbia, South Carolina, an energy-based holding company, announced it was merging with Public Service Company of North Carolina, Inc. (a natural gas utility) in that same year.
From 1996 to 1998, gas distribution assets and revenues grew by 59 and 29 percent, respectively, for electric utility holding companies; however, international assets still exceed those of gas distribution as the leading form of diversification. These increased a whopping 173 percent the same period, with revenues doubling. Another huge growth was seen in telecommunications assets, which rose 658 percent with a similar increase in revenues.
The amount of oil and gas exploration and processing assets rose by 51 percent for the same period, whereas pipeline assets jumped by 89 percent. Electric utility holding companies are also acquiring trading organizations, with revenues growing from $7.6 billion in 1996 to $47.7 billion in 1998.
Other utility companies are either reorganizing into a holding company structure or acquiring competitors. In 1999, for example, one natural gas holding company, Southern Union Co. of Austin Texas, acquired its rival, Valley Resources Inc. Public Service Company of New Mexico, an electric and gas utility, split its business into two subsidiaries under a new holding company that same year. Washington Gas Light Company also announced it was forming WGL Holdings, Inc., so that it and its subsidiaries could operate separately under the holding company.
Other types of holding companies, both foreign and domestic, were expected to diversify internationally throughout the 1990s. Analysts thought horizontal and vertical integration would allow more firms to reach new markets and to produce goods and services more efficiently. Many holding corporations should also benefit from advanced information systems that allow more efficient centralized control of their enterprises.
Cashin, John and Esquivar, Joan. "Financial Review: What's the Holding Company Holding?" Electric Perspective, November/December 1999.
Hoover's Company Profiles. Hoover's Inc., 1997. Available from http://www.hoovers.com .
Leibowitz, Alissa. "The Utilities Economy: The Next Big Thing." Venture Capital Journal, 1 January 2000.
"PNM Seeks to Form Holding Company." PR Newswire, 17 November, 1999.
"SCANA & PSNC to Close Merger on February 10, 2000" PR Newswire, 29 December 1999.
"Washington Gas Announces Intention to Form Holding Company." PRNewswire, 30 December 1999.