Takeover incentives and defence with Cross Partial Ownerships

We analyse takeovers in an industry with bilateral capital-linked firms in Cross Partial Ownerships (CPO). We find conditions for stable equilibria in takeovers with the target being inside or outside of a CPO arrangement. The impact of CPO upon profitability for the raider, the target and the rest of the industry is two-sided in a Cournot setting and depends on the value of CPO and on the type of target. CPO shows anticompetitive effects by facilitating mergers in most cases. However, a protective threshold (takeover ratio<1) exists below which CPO arrangements can reduce the incentives for a hostile takeover of a targeted member of the CPO agreement. Further, even above this protective threshold CPO may make hostile (protected) takeovers less profitable than a benchmark industry without CPO (a result with potentially significant regulatory implications). An empirical application showcases the potential relevance of CPO as a defence against hostile takeovers across different industries.