Cross-Holding and Acquisition: The Role of Cross-Equity Position on the Profitability of Acquisition

Author: Aishwarya Ray
Degree: M.S. in Financial Engineering
Year: 2021
Advisory Committee: Dr. Suman Banerjee, Dr. Emmanuel Hatzakis, Dr. Zachary Feinstein

Abstract: In this thesis, we develop a simple model to explore the likelihood of a profitable acquisition in a standard oligopolistic market framework. We show that without costs synergy any acquisition is unprofitable. Next, we derive the bonds of costs synergy between two firms that facilitate a profitable acquisition. Further, we allow cross-cross-equity positions between firms and show that cross-equity positions among firms in the industry facilitate profitable acquisitions. The intuition is quite straightforward: increased industry concentration helps every firm in the industry other than the acquiring firm. If the acquiring firm holds cross equity positions, then the acquiring firm benefits from the increased valuation of the existing firms in the industry. Furthermore, our results are based on the fundamental conditions that eliminate “the merger paradox” and “the insiders’ dilemma” - results that have made it difficult to justify horizontal mergers in a linear, homogeneous, symmetric Cournot market in the existing literature.