Secondary Business

Key Takeaways

• Secondary businesses support a corporation's core functions but are not one of them.
• These businesses can become independent, profitable enterprises over time.
• A parent company may still benefit from a secondary business after it is spun off or sold.
• Secondary businesses can be formal subsidiaries or simply units contributing to the parent company's revenue.
• Ally Financial and GE Capital, which started as parts of larger corporations, are examples of secondary businesses.

What Is a Secondary Business?

While part of a corporation, a secondary business isn't one of its core functions. Rather, it may complement its focus and its revenue can support its financial performance and health. A secondary business can be an independent, profitable enterprise with its own assets and may continue to serve the originating corporation even after being spun off or sold. A secondary business might be a subsidiary of the parent company, depending on the percentage of share ownership. On the other hand, it may just be a unit contributing to the parent company's revenue.

The Role of Secondary Businesses in Corporate Strategy

Secondary businesses that were created to provide a service to a parent company or their customers can become sizable, free-standing and profitable enterprises in their own right. Even if a secondary business is spun off, sold, or goes public, it may still continue to provide services for the originating corporation depending on the remaining investment.

Important

A secondary business is most likely to be brought forward as an option during the reorganization or distribution of a multi-business corporation and can be either part of the company making the acquisition or the target company.

Distinguishing Secondary Businesses from Subsidiaries

A secondary business may be considered a subsidiary if the parent or holding company holds more than 50% of its outstanding shares, known as a controlling interest. If a subsidiary is 100% owned by a parent or holding company it is known as a wholly owned subsidiary.

A secondary business may not be a formal subsidiary but simply be a unit of a holding company or conglomerate, contributing a fraction of the revenue to the parent's bottom line.

Notable Examples of Leading Secondary Businesses

There are numerous examples of secondary businesses that have been spun-off, stand alone from their parents, or even dwarf the companies they were once subordinate to. Some examples include the following.

Ally Financial Inc.

Formerly known as GMAC Inc. (an acronym for General Motors Acceptance Corp.), this lender was founded in 1919 by General Motors to provide financing to car buyers. It was later involved in insurance, mortgage lending, and other financial services. It became a bank holding corporation in 2008 and took its current name in 2009. Ally went public in 2014.

GE Capital

This financial services unit of General Electric provides commercial lending and leasing for a variety of customers, as well as for buyers of GE's big-ticket products, such as energy, healthcare equipment, and commercial aviation products. It was founded in 1932 and has over $500 billion in total assets. it spun off its consumer finance arm, Synchrony Financial, via IPO in 2014.

Sidewalk Labs Inc.

This company, owned by Alphabet Inc. (Google's parent) provides mapping, congestion, and road condition monitoring information that can help cities plan for greater efficiency in road, parking and transit projects.