A new strategy against hostile takeovers: a model of defense in participations

This article examines the efficacy of a “defense in participations” policy consisting of competitors acquiring cross equity participations within the same industry to prevent hostile takeovers. This defense in participations strategy provides disincentive for raiders as partial ownerships increase market power of competitors and then reinforce the “outsider effect”. Also, we find conditions for a general result which states that takeovers are less profitable in an industry with participations rather than in an industry without any capital links. We provide information to regulators about the positive social impact of cross participations in the context of mergers, and expose an economic dilemma between a “laisser-faire” and an interventionist approach.