The Holding Company

The HoldCo

The Origins of Holding Companies in America

Holding companies have their roots in the 1880s Gilded Age of America, emerging from industrial and manufacturing conglomerates during the Second Industrial Revolution, a period that also saw mass immigration and rapid urbanization. During this period, the American population shifted largely from self-employment to wage labor, and businesses discovered assembly lines, mass production, and economies of scale, which drove immense wealth creation.

Trusts: The Original Holding Company

In the 1880s, states did not have a framework to enable companies to operate across state lines, so businesses expanded by setting up entirely new businesses with similar individual owners. This was complex and created multiple financially disjointed operations. To get around this, in 1882, John D. Rockefeller formed the Standard Oil Trust, which pooled the ownership of 40 separate entities into a trust controlled by nine trustees (History of Standard Oil). Other business groups quickly followed and adopted this trust model, which can be viewed as the origin of the holding company structure.

Sherman Act

As these trust conglomerates grew across oil, steel, railways, and public utilities, they began to act in anticompetitive and monopolistic ways: suppressing competition, controlling markets, restricting production, and manipulating pricing. Public concern grew through the 1880s, which led to the Sherman Antitrust Act of 1890. The Sherman Act enabled the federal government to investigate and break up trusts that concentrated control over multiple corporations and engaged in monopolistic practices.

Seemingly in anticipation of the Sherman Act, New Jersey legalized corporations owning shares in other companies in 1888, a revolutionary concept at the time. With public and regulatory pressure, Rockefeller leveraged this loophole to reorganize Standard Oil from a trust into a true holding company structure as the Standard Oil Company of New Jersey at the turn of the century. The Sherman Act initiated the cat-and-mouse game between regulators and business empire builders that would intensify over the next half-century, a game in which innovative and financially motivated individuals would typically be one step ahead of reactionary regulators.

The holding company structure quickly took hold: between 1895 and 1904, 167 holding groups consolidated more than 1,800 companies and ultimately controlled over 40% of the capital invested in the industrial sector (Great Pyramids of America). Other notable examples of groups that took advantage of the new holding company structure in the late 19th and early 20th century include: Northern Securities Companies (railroads), General Electric (electricity), US Steel (steel), DuPont (chemicals), General Motors (automobiles), and Eastman Kodak (photography).

Theodore Roosevelt: The “Trust Buster”

“We demand that big business give the people a square deal; in return we must insist that when anyone engaged in big business honestly endeavors to do right he shall himself be given a square deal.” - Theodore Roosevelt

President Theodore Roosevelt (in office 1901-1909) was elected with a promise to crack down on monopolistic corporations aggressively. He initiated 44 anti-trust lawsuits against holding company conglomerates, nearly three times as many as his predecessors. In his most prolific success, the Supreme Court dissolved J.P. Morgan’s Northern Securities railroad conglomerate in 1904, creating a major precedent for the future. Even Standard Oil was broken up in 1911 when the Supreme Court ruled it was a monopoly.

However, rulings often created ambiguity, which opened up potential loopholes. The 1911 Standard Oil ruling, for example, established that restraints of trade were illegal only if they led to higher prices, reduced output, or reduced quality.​ With this, holding companies could argue their economies of scale actually benefit consumers, and the burden of proof shifted to prosecutors to demonstrate consumer harm. This, as well as lobbying and “pyramiding”, whereby a holding company could hold 51% of a subsidiary that in turn owned 51% of another subsidiary and enabled the top holding company to effectively control operations with only 26% of invested capital, created obscurity and further legal cover for holding companies.

Mid Century Reforms

The Great Depression Exposes Fragility

When the Great Depression hit the US economy in 1929, it quickly exposed the fragility of highly leveraged holding company conglomerates under pyramid structures. Insull Utilities, an electricity and electric-powered railways conglomerate, became the poster child of this fragility. The sharp rise in unemployment drove down ridership on Insull’s railways and consumers reduced electricity consumption to save money, which drove massive losses for Insull and forced the failure of one of their top three holding companies. This cascaded through its leveraged structure and magnified losses to subholding companies.

The New Deal as a Death Sentence

With Insull, many similar examples, and the severe economic pain felt across the American people, President Franklin Delano Roosevelt (FDR) brought forward a number of sweeping legislative acts and programs known as the New Deal aimed at economic relief and government expansion to protect consumers. It also drastically curbed pyramid-style holding company conglomerates through three key measures:

• 1933 Securities Act: required public companies to register with the SEC and submit audited financial statements. This act led to the creation of the SEC and provided transparency into the operations and structures of pyramid-style holding companies.
• 1935 Public Utility Holding Company Act: specifically for utilities, forced the breakup of any holding company with more than 2 tiers, limited holding company operations to a single state, and forced industry consolidation (e.g., electricity OR gas, not both)​.
• 1936 Revenue Act: across any industry, imposed a 15% tax on intercorporate dividends (previously there was none) unless the parent's equity holding in the subsidiary exceeded 85%.

Throughout the 30s, 40s, and 50s, stricter antitrust enforcement continued, and additional banking reforms (such as the Bank Holding Company Act of 1956) added further pressure. The large conglomerates did fight back, but of the 54 holding company groups existing between 1926 and 1950, only 17 survived to 1950 (Great Pyramids of America).

Reinvention of HoldCos

During the 1960s, by avoiding the strict punitive regulation of utility and banking conglomerates as well as the taxes on partial ownership pyramid structures, a new industrial and diversified conglomerate merger wave took off. Companies like ITT, LTV, and General Electric rapidly expanded through acquisitions and built large conglomerate structures during this era. Another emerging holding company acquiring businesses in this era was Berkshire Hathaway.

Berkshire: A New Model

In 1965, Warren Buffett acquired a controlling stake in a struggling textile business, Berkshire Hathaway, and began investing the cash flows in other insurance businesses and diversified ventures. Over time, Buffett and Charlie Munger turned the textile business into a holding company and the storied investment conglomerate that we all know today (Berkshire Hathaway).

In stark contrast to the holding companies of the past, Buffett and Munger’s management style focused on extreme decentralization and operating authority across a diverse multitude of independently run businesses. Berkshire had two requirements for subsidiaries: submit monthly financial statements and send free cash flows to headquarters. This structure and extraordinary autonomy were predicated on Berkshire’s investment model of buying “wonderful businesses at fair prices”; the businesses they brought in-house were typically already operating well, so Buffett and Munger simply needed them to continue performing.

Driven by its diversification, decentralized management, long-term focus, and patient capital, today Berkshire stock has appreciated 5.5 million percent since 1965, compared to ~39 thousand percent for the S&P 500 (CNBC).

Private Equity Adoption

Private Equity (PE), a cottage industry at the time, also started adopting holding company structures in the 1950s and 60s to pursue investments and wholly owned subsidiaries. The first leveraged buyout (LBO) may have been a 1955 acquisition of two steamship companies by McClean Industries as a holding company, with the majority of capital raised via debt. Other early PE pioneers made similar transactions in the 1960s, and growth continued in the 1970s (for example, KKR was founded in 1976). During this time, the GP/LP fund structure we know today began forming as well. An estimated 2,000 plus LBO deals with values in excess of $250m took place during the 1980s before the LBO market collapsed at the end of the decade.

As the industry professionalized and diversified in the 1990s and 2000s it also adopted the three-tier holding company structure that dominates PE today, consisting of a top holding company (Topco) as the main equity pool and investment vehicle, a middle company (Midco) acting as a conduit and taking on debt, and bidding company (Bidco) that actually acquires the target company. The structure offers multiple benefits across risk management between entities, debt efficiency, tax optimization, operational control, and regulatory compliance.

Tech Restructuring

Inspired by Buffett, Google reorganized itself into Alphabet in 2015, a holding company with semi-autonomous subsidiaries composed of Google (internet services), CapitalG and GV (investment funds), Waymo (autonomous vehicles), Fiber (internet), DeepMind (AI research), and others. Its most important operating business has remained Google, which includes search, ads, Android, YouTube, cloud, and maps. The Alphabet corporate structure allowed these highly profitable business lines to separate from the unrelated moonshots, both from an operational and financial reporting perspective.

Another motivator for the Google restructuring may have been reducing the appearance of monopolistic concentration as a single entity and avoiding antitrust scrutiny. However, if this was a motivator, it is clear that it has not been highly effective given that regulators continue to target business lines within Google itself, as evidenced by recent antitrust cases.

Unlike Berkshire Hathaway, which holds mature and profitable businesses, Alphabet’s additional holding companies are financially dependent on Google’s advertising cash cow. This is a key difference, and Eric Schmidt’s own observation highlights the challenge: “an attempt to build a holding company like Berkshire Hathaway out of an existing operating company—it's never been done before.”

More recently, both Sony and Meta (Facebook) undertook holding company restructures for similar reasons in 2021.

Benefits and Drawbacks Today

Holding company structures are not a one-size-fits-all strategy. Today, they can be deployed to great effect in certain situations but also have significant drawbacks.

Key Benefits:

• Asset protection and risk isolation​: provides a legal firewall between entities, preventing creditors from accessing assets across the corporate group
• Tax efficiency: holding companies that own 80% or more of subsidiaries can file consolidated tax returns and offset profits and losses
• Strategic diversification: holding company structures enable diversification across industries, geographies, and business models while compartmentalizing risk
• Portfolio company autonomy: each subsidiary operates independently with accountability, yet benefits from shared resources, strategic guidance, and knowledge transfer

Key Drawbacks:

• Conglomerate discount: the market tends to value holding companies with unrelated businesses at 13-15% less than the sum of their individual parts
• Overhead and compliance: holding company structures incur multiple layers of compliance, taxation, and administration (both at formation and ongoing)
• Management expertise: unless managed with full autonomy or with highly similar businesses, management must develop competency across multiple unrelated industries
• Resource starvation: it is possible for exciting assets to get caught up in the conglomerate and not receive the attention or capital that they need to flourish

Takeaways: Holding companies are not inherently good or bad, they are simply a tool. Throughout history, they have been used in different ways to achieve different goals. At first, holding companies were set up to get around the regulatory limitations of operations across state lines, even for businesses that aimed for centralized management. Over time, holding companies became a legal instrument for tax efficiency (or skirting) and extreme financial leverage, which eventually brought on their first downfall. Buffett and Munger through Berkshire Hathaway then pioneered the decentralized and highly autonomous holding company strategy that many have tried to emulate to this day (including Google and other tech companies).

Throughout the past century and a half, the holding company structure and its implementation have reflected the broader tensions in American capitalism. These tensions arose between consumer protections and innovation, concentration and competition, and between public accountability and private enterprise. All of these developments revealed a constant push-and-pull between the free market’s desire to innovate and the regulatory oversight to ensure fair market practices.