Definition of investor and investee
Investor is a term used to refer to an individual or an institution that provides capital for investment with a hope of acquiring financial returns. An investee is the company or any business organization in which an investor has invested in. This occurs in equity investment where an investor has committed capital in form of shares. Investors can be commercial, international, local or development finance institutions. Commercial investors basically concerned with investing for financial returns that guarantee high yields. They are not much concerned with development of the investee. International investors carry out investment on international scale and are prepared to take currency risks. They are concerned with acquiring hard currency returns. Local investors are investors who operate locally and look for local currency gain. The local, international and commercial investors do not care about the development returns but care about financial returns only. Development finance institutions are concerned with both development returns and financial returns of the organizations they fund. The investee gets the relevant funding from the investor in order to strengthen its financial base and be able to cover all its operation costs. The investee company must fulfil the conditions and requirements of the investor before funding can occur. The investor in some cases monitors the activities of the investee to control financial activities so as to realize the purpose of the investment (Maxwell 17).
Definition of the terms, parent company and subsidiary company
A parent company is any organization that holds a large share of a voting stock in another company such that it controls the decision making and hence the operations and management of that company. A parent company has a direct control of the board of directors of the subsidiary company. If a company holds more than 51% of the shares of a subsidiary company it is considered the parent company of the held company. The parent company gains the necessary votes required to decide who will form the board of directors of the subsidiary company. In case of a full takeover, the held company looses its identity as an independent company and starts to operate as a subsidiary of the company that has taken it over. A subsidiary company is any company that is controlled and dependent on another company usually the parent company. The parent company and the subsidiary may or may not operate similar businesses, and they can be located in similar or different locations. In cases where they operate the similar business they can be perceived as competitors. Business organizations often establish subsidiaries so as to enjoy various benefits. The parent company may wish to operate a new line of business which is totaling different from the parent company business line. In such a case developing the business from scratch is often difficult and time consuming. It becomes therefore easier to take over an already established company. The parent company may project high revenues from sale of the subsidiary company’s product especially where the new business commands a large segment of the market. A subsidiary business may also be established where the parent company prefers to shield its assets from the liabilities linked to the purchased company. It is also important where the new line of business may incur liabilities which can not be catered for by the parent company or where the parent company is public and wishes to operate the subsidiary as a private company, and where the parent company wishes to let the subsidiary company go public with no involvement of shareholders of the parent company (Lazonick, & O’Sullivan, 13-15).
The relationship between parent and subsidiary company
Equity investment occurs where individuals and firms buys and holds shares of stock hoping to receive income in form of dividends. The holders of shares also anticipate capital gain from the rise of value of the held stock. Through equity investment in both Coca-Cola Enterprises and Coca-Cola Amatil, the Coca-Cola Company enjoys a series of benefits that accrue to equity investment. The company enjoys good returns from capital gain. The company holds majority of shares in both companies and hence it is able to influence their activities and the way the companies are run for its benefit. The Coca-Cola Company has decided not to obtain more than 51% of shares in both companies so that they can remain independent (Maxwell, 97).
The merits and demerits for Coke using Equity investments rather than owning more than 51 % shares of the two bottling companies
The Coca-Cola Company has decided not to hold these companies as subsidiary so that they can enjoy low taxation on their net income. With acquisition of 51% or more of their shares, the companies by law will assume the status of subsidiaries and the Coca-Cola Company becoming the parent company. The company will loose much of its net income as tax will be based on the combined net income of the three companies. Similarly, there will be cases of double taxation on the net profit as each subsidiary company will have to pay tax based on the net profit posted in its balance sheet. The second taxation will be based on the overall net profit posted in the collective balance sheet of the Coca-Cola Company. Being the largest shareholder in the two companies, the Coca-Cola Company is able to get good returns in form of dividends. The amount of tax paid from the revenue obtained in form of dividends is less than what could have been paid compared to when the two companies are subsidiary of the Coca-Cola Company. The two bottling companies are located in different countries which have different tax policies. Each company pays a different amount of tax depending on taxation laws of that country. The total amount paid in tax is less based on each company’s net earnings than when taxation is based on collective total net profit (Statman, 468-469).
The advantages of keeping the two companies as Coca-Cola internal bottle departments
It is generally easier to manage a small firm than a large firm. In my opinion it is a good idea for the Coca-Cola Company to keep the two companies as its internal bottle department. Each company is managed differently with independent management unit. The management is able to concentrate best with its customers within the market it serves. The two companies are located in two different locations. The requirements and the composition of the customers differ with locations. The management is therefore able to easily identify the changing needs of the consumers within its region by having a direct contact with them. With small market to attend, the management is able to carry out research on product development by incorporating the views of the customers as well as having innovations to the products to better satisfy the customers needs. The Coca-Cola Company is able to asses the potentiality of each market and formulate ways of making the market more profitable. It is also able to control the activities of each company towards attainment of the overall goal of the Coca-Cola Company (Sahlman, 27).
Work cited
Statman, L, ‘How many stocks make a diversified portfolio?’ the Battermarch Fellowships Papers, Oxford: Basil Blackwell, 468-469, 1990.
Sahlman, W. ‘The structure and governance of venture-capital organizations’, Journal of Financial Economics 27, 473-521, 1990.
Maxwell, R. Private Equity Funds: A Practical Guide for Investors. New York: John Wiley & Sons. ISBN0-470-02818-6, 2007.
Lazonick, W. O’Sullivan, M. “Maximizing shareholder value: a new ideology for corporate governance”. Journal Economy and Society 29 (1): 13–15, doi:10.1080/030851400360541, 2000.