Offices of Holding Companies, NEC

SIC 6719

Companies in this industry

Industry report:

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.

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 to integrate both horizontally and vertically through its subsidiaries. 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 formed in New Jersey, after that state passed the New Jersey Holding Company Act that 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 continued to operate 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 recession of the late 1980s, 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 percentage of utilities that owned natural gas distribution companies increased from 40 percent to 55 percent by the end of 1998. In the early 2000s, 11 mergers united companies involved predominantly in electricity with natural gas companies. For instance, SCANA Corporation of Columbia, South Carolina, an energy-based holding company, merged with Public Service Company of North Carolina, Inc. (a natural gas utility).

From 1996 to 1998, gas distribution assets and revenues grew 59 and 29 percent, respectively, for electric utility holding companies. However, international assets still exceeded those of gas distribution as the leading form of diversification. These increased a whopping 173 percent in 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 either reorganized into a holding company structure or acquired 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 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, diversified internationally throughout the 1990s. Horizontal and vertical integration allowed more firms to reach new markets and to produce goods and services more efficiently. Many holding corporations also benefited from advanced information systems that allowed more efficient centralized control of their enterprises.

During 2001 the U.S. economy entered a recession, made worse by the terrorist attacks of September 11, 2001. As a result, the industry saw reduced merger and acquisition activity as companies remained conservative in spending due to the depressed economic conditions. Consumer spending rose in the mid-2000s, however, as interest rates reached historic lows and companies looked to increase their bottom line despite continued tight profit margins in many industries. Thus, during 2004 and 2005 there was an upswing in mergers and acquisitions as holding companies put forth the cash to increase their portfolios and keep their expenses in check.

In the mid-2000s the Public Utility Holding Company Act of 1935 was repealed by the Energy Policy Act of 2005. In response, the Federal Energy Regulatory Commission (FERC) issued new rules on how it would regulate utility holding companies as well as review utility mergers and acquisitions over $10 million in size. The new ruling, which went into effect February 8, 2006, put in place the new FERC rules, referred to as the Public Utility Holding Company Act of 2005 (PUHCA 2005). One of the changes that occurred was that the responsibility for overseeing PUHCA requirements shifted from the Securities Exchange Commission (SEC) to FERC. Other changes included the elimination of the rule that utilities had to be physically interconnected, operate within a single region, or confine their activities solely to utility-related businesses. The elimination of these provisions opened the door for such activity as the proposed $12.5 billion merger of energy giants FPL Group, Inc. and Constellation Energy. Although the FPL Group and Constellation Energy merger was eventually called off, other mergers occurred within the industry that previously would not have been allowed.

As globalization became a reality during the 2000s, many holding companies diversified their portfolios with foreign interest. In addition, foreign companies began to pursue U.S.-based businesses. For example, in mid-2005 the U.S. House of Representatives passed two measures to stop the proposed $18.5 billion sale of Unocal, the ninth largest oil company in the United States, to state-run Chinese National Offshore Oil Company. Earlier in the year China made other inroads into the U.S. markets. China's Lenovo Group bought IBM's personal computer unit for $1.75 billion, and the Haier Group, China's largest appliance maker, purchased Maytag for $1.28 billion. Although China's investments in the United States far outweighed the U.S. presence in China, the market began to open up. For example, in 2004 Anheuser-Busch acquired Harbin Brewery Group, one of the largest and older breweries in China.

According to research firm IMAP, the number of mergers and acquisitions (M&A) in the alternative energy sectors increased 54 percent in 2009. IMAP reported that M&A activity in renewable energy's three major sectors--solar power, wind energy, and biofuels--was worth $20.4 billion that year. China was the leader, with deals worth $5.4 billion, followed by the United States with $2.6 billion. Spain, the Phillipines, and India rounded out the top five.

Japan was also a hot spot of activity. For example, Toshiba Corp. announced in 2009 that its U.S. unit Westinghouse Electric would purchase 52 percent of Japan's Nuclear Fuel Industries.

The subprime mortgage crisis and resulting meltdown in the Wall Street investment industry took a toll on many holding companies, including utilities holding companies. For example, after Lehman Brothers filed for bankruptcy in 2008, Constellation was headed in the same direction and survived only through a buyout from Electricite de France.

By the late 2000s, many public utility holding companies had entered into agreements to purchase assets that involved power produced by wind, solar, biomass, and geothermal energy. Many of these projects depended on federal funds to operate, such as those provided through the American Recovery and Reinvestment Act of 2009. However, according to Public Utilities Fortnightly in 2010, "The economic downturn has dramatically reduced the profits (and tax liabilities) of the banks and life companies that historically have funded tax equity, severely limiting the availability of tax credits for renewable energy projects." Nevertheless, some companies forged ahead. For example, Northeast Utilities, the parent company of Public Service of New Hampshire, announced in October 2010 that it would purchase natural gas and electric company NStar for $4.3 billion. According to New Hampshire Business Review, the all-stock merger would create the largest utility company in New England, with a total of about 3.5 million customers and $8.5 billion in annual revenue. The new company, called Northeast Utilities, had plans to build and operate renewable energy projects.

Many other transactions involved new sources of energy in the late 2000s and early 2010s. One instance was DTE Energy Services' 2010 acquisition of a major interest in the 49.5-megawatt Mt. Poso Cogeneration Company power plant in California. According to Electric Energy, DTE planned to operate the plant and co-lead its conversion to 100 percent biomass fuel. Most of the wood fuel would come from urban wood waste, tree trimmings, and agricultural residues.

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