Subsidiary Absorbs Majority Shareholder: The Logic of "Survival of the Fittest" in the Market

Shanghai Securities Journal reporter: Yu Shengliang

A subsidiary's development can be better than its parent company, and ultimately it absorbs the majority shareholder, which reflects the importance of continuous innovation and also reflects the market logic of "survival of the fittest".

Recently, two listed companies in A-share, HaiGuang Information Technology Co., Ltd. and Zhongke Xuguang Technology Co., Ltd., simultaneously announced their plans to reorganize major assets, with HaiGuang Information absorbing and merging Zhongke Xuguang. Zhongke Xuguang was established in March 2006 as the predecessor of Tianjin Xuguang Computer Industry Co., Ltd., listed on the Shanghai Stock Exchange in November 2014, and jointly set up HaiGuang Information with Tianjin Haitai Technology Investment Co., Ltd. and the Institute of Computing Technology at the Chinese Academy of Sciences. Zhongke Xuguang initially held a stake of 32.10% as the controlling shareholder of HaiGuang Information.

Both HaiGuang Information and Zhongke Xuguang have developed well, but HaiGuang Information has gained key development resources, with its business development and capital market performance standing out more prominently. As of May 23rd, the closing price of A-share, HaiGuang Information's market value reached CNY 3,164.12 billion; Zhongke Xuguang's market value was CNY 905.72 billion.

HaiGuang Information is an upstream company of Zhongke Xuguang, and the two companies have complementary relationships with many related businesses. HaiGuang Information's CPU and DCU chips are the core underlying support for Zhongke Xuguang's servers and computing platforms. When Zhongke Xuguang develops its business, it extends along the industrial chain towards upstream and grasps the wind of industry transformation. Companies need to safeguard their main business and make efforts to develop new opportunities, but this does not mean that they will remain unchanged forever; many companies have established new companies for new businesses, which may be a second growth curve.

Similar scenarios have also appeared on Sina Weibo. Sina started as a portal website and attempted to explore multiple fields, including chat software, before Sina Weibo became a phenomenon-level product in 2009. Two years after its listing, Sina Weibo's market value exceeded USD 100 billion, while its parent company, Sina.com, continued to decline, eventually being privatized. Now, Sina Weibo is continuously acquiring assets from its parent company.

There are many examples of subsidiaries absorbing and merging with their parent companies, such as WanHua Chemical's announcement in 2018 that it absorbed and merged with Shenyang WanHua Chemical Co., Ltd. for a consideration of CNY 522.12 billion, among others. However, most of these cases aim to achieve business integration.

To maintain the company's long-term development, innovation is crucial, and actively seeking new opportunities can help the company stay vibrant. Large companies have already developed a sufficient moat, but they are still actively cultivating new businesses, which may initially seem insignificant but may one day grow into towering trees. The cultivated new business will also be part of entrepreneurship success, through similar mergers and acquisitions, the capital market can maintain innovation and vitality, allowing the winners to stand out.