Cross ownership

What Is Cross Ownership?

Cross ownership, in Corporate Governance, refers to a situation where two or more companies own shares in each other. This reciprocal ownership can range from minority stakes to controlling interests, creating intricate webs of corporate relationships. This structure differs from a simple parent-subsidiary relationship, where one parent company holds a controlling stake in another entity, known as a subsidiary. Instead, cross ownership implies a mutual investment, where each entity is both an investor and an investee in relation to the other.

Such arrangements can be intentionally established for strategic alliances, joint ventures, or to strengthen business ties. However, cross ownership can also emerge from complex mergers and acquisitions or investment activities, sometimes leading to situations that raise concerns about market competition and control. Understanding cross ownership is crucial for analyzing a company's true capital structure and potential influence over other entities.

History and Origin

The practice of intercorporate ownership, including cross ownership, has roots stretching back to the late 19th and early 20th centuries, particularly with the rise of industrial trusts and large conglomerates. These structures were often employed to consolidate power, limit competition, and establish vast business empires. Concerns over these concentrations of power led to the development of antitrust laws. For instance, the Sherman Antitrust Act of 1890 in the United States was enacted to curb concentrations of power that interfere with trade and reduce economic competition, broadly prohibiting anticompetitive agreements and monopolistic conduct¹⁴, ¹⁵.

Throughout the 20th century, various forms of intercorporate ownership continued to evolve, often driven by economic conditions, regulatory environments, and global expansion strategies. While outright cartels became illegal, more subtle forms of reciprocal ownership sometimes emerged, prompting ongoing regulatory scrutiny and academic debate regarding their impact on markets and corporate behavior.

Key Takeaways

• Reciprocal Shareholding: Cross ownership involves two or more companies holding equity shares in each other.
• Strategic vs. Accidental: It can be a deliberate strategy to foster alliances or an incidental outcome of investment activities.
• Governance Implications: Cross ownership can significantly influence corporate governance, voting rights, and decision-making.
• Market Impact: It raises concerns about potential anti-competitive practices, market consolidation, and reduced competition.
• Regulatory Focus: Jurisdictions often impose regulatory scrutiny on cross ownership to prevent market manipulation or conflicts of interest.

Interpreting Cross Ownership

Interpreting cross ownership involves assessing its impact on the independence, competitive behavior, and financial health of the involved companies. When companies hold significant stakes in each other, it can blur lines of control and create complex relationships among shareholders and the board of directors.

For example, if Company A owns 15% of Company B, and Company B owns 10% of Company A, their reciprocal interests might lead to aligned decision-making, potentially reducing competitive pressure between them. This alignment could also extend to other aspects, such as shared strategic goals or even a reduced incentive to compete aggressively in the market. Analysts often examine the percentage of equity held and the overall market context to understand the potential implications of cross ownership on competition and market dynamics.

Hypothetical Example

Consider two publicly traded companies, Alpha Corp. and Beta Inc., both operating in the technology sector but with distinct product lines. To foster a strategic alliance and share research and development resources, Alpha Corp. decides to acquire 5% of Beta Inc.'s outstanding shares. In turn, Beta Inc., seeking to secure a stable long-term relationship and gain insights into Alpha Corp.'s market approach, purchases 3% of Alpha Corp.'s shares.

In this scenario, Alpha Corp. and Beta Inc. have established cross ownership. Both companies are now minority shareholders in each other. This arrangement could lead to enhanced collaboration on technology projects, shared distribution networks, or joint marketing efforts. However, it also introduces a layer of interdependence, where the financial performance or strategic shifts of one company could directly impact the other's stock value and strategic direction. This cross ownership structure creates a vested interest in each other's success beyond typical client-vendor relationships.

Practical Applications

Cross ownership manifests in various aspects of investing, markets, analysis, and regulation. It is particularly relevant in:

• Strategic Alliances and Joint Ventures: Companies may engage in cross ownership to cement strategic partnerships, align interests, and share risks and resources for specific projects or market expansions.
• Defense Against Hostile Takeovers: A company might acquire shares in a potential acquirer, or vice-versa, as a defensive measure to complicate a hostile takeover attempt by making the target less attractive or more difficult to fully integrate.
• Market Structure Analysis: Regulators and economists analyze cross ownership to understand market consolidation and potential anti-competitive effects, such as reduced competition or coordinated pricing. The U.S. Department of Justice and the Federal Trade Commission (FTC) issue Merger Guidelines which outline their analytical approach to merger review, including how they assess potential competitive harms that could arise from such ownership structures¹¹, ¹², ¹³.
• Investment Analysis: Investors assessing a publicly traded company must consider cross ownership stakes as they can affect a company's financial results, governance, and long-term strategic independence.
• Regulatory Oversight: Government bodies monitor cross ownership to prevent market manipulation and ensure fair competition, especially in highly concentrated industries.

Limitations and Criticisms

While cross ownership can foster collaboration and stability, it also presents several limitations and criticisms, primarily centering on potential distortions of competition and corporate governance.

A significant concern is the potential for conflict of interest. When companies own stakes in each other, their respective board of directors and management teams might prioritize the mutual interests of the cross-owned entities over the individual interests of their own minority shareholders or the broader market. This can lead to decisions that benefit the intertwined group at the expense of competition or independent shareholder value.

Furthermore, critics argue that extensive cross ownership, particularly among institutional investors with stakes across competing firms (often referred to as "common ownership"), can dilute incentives to compete aggressively. Academic research has explored these effects, suggesting that common ownership, even when passive, can lead to higher consumer prices due to reduced competitive pressure⁸, ⁹, ¹⁰. The National Bureau of Economic Research (NBER) has published studies examining how common ownership can affect product market outcomes by influencing managerial incentives and potentially leading to less aggressive competition among rival firms⁶, ⁷. Such structures might also hinder innovation if companies become too comfortable with their interconnected relationships rather than striving for competitive advantage.

Cross Ownership vs. Beneficial Ownership

Cross ownership and beneficial ownership are distinct concepts in finance, though both relate to who ultimately controls or benefits from a company's shares.

While cross ownership describes a specific structure of direct inter-corporate shareholding, beneficial ownership seeks to pierce through any ownership structure—including those involving cross ownership—to identify the individual or entity that ultimately benefits from or controls the shares. For instance, a complex web of cross-owned companies might still have a single beneficial owner at the top of the pyramid, or several beneficial owners across different segments. The OECD Principles of Corporate Governance emphasize transparency in ownership structures to ensure equitable treatment of shareholders and accountability.

#¹, ², ³, ⁴, ⁵# FAQs

Can cross ownership lead to monopolies?

While cross ownership itself doesn't automatically create a monopoly, significant reciprocal stakes, especially between competing firms, can reduce competition and lead to market consolidation. This diminished competition can raise concerns for antitrust authorities, potentially leading to interventions to prevent monopolistic behavior.

Is cross ownership always legal?

Cross ownership is generally legal, but it is subject to regulatory scrutiny, particularly from antitrust bodies. Regulators examine such arrangements to ensure they do not result in anti-competitive practices, undue market influence, or conflicts of interest that harm consumers or other market participants.

How does cross ownership affect a company's stock price?

Cross ownership can influence a company's stock price in several ways. It might signal a strong strategic alliance, potentially boosting investor confidence. However, if the market perceives that cross ownership leads to a conflict of interest or reduced competition, it could negatively impact the stock due to concerns about governance or long-term growth prospects.

What is the difference between cross ownership and common ownership?

Cross ownership involves two or more companies directly owning shares in each other. Common ownership, often seen with large institutional investors or asset managers, refers to a single investor (or group of investors) holding minority stakes in multiple, often competing, companies within the same industry. While cross ownership is reciprocal among companies, common ownership is typically one-sided, with an external investor holding stakes across various firms.

Why do companies engage in cross ownership?

Companies engage in cross ownership for various strategic reasons, including forming stronger alliances, facilitating joint ventures, sharing technology or resources, or creating a deterrent against hostile takeovers. It can also be a way to ensure long-term stability in supplier or customer relationships.