It Takes Two to Tango: Interlockings and Partial Equity Ownership

Abstract

We study the relationship between the acquisition of partial equity ownership and interlocking directorates among rival companies. Partial equity ownership between rivals in the product market is convenient, even in the case of passive participation, since, internalizing competition, raises the profits of both companies. The price of the acquisition, however, is affected by the marginal cost of the target company. When this cost is private information, the bidder has to elicit the true value of the equity stake from the target through a proper design of the offer in the context of asymmetric information. One possible alternative is for the bidder to propose an interlocking directorate to observe the private cost: to achieve this goal, the bidder has to convince the target to host one of his executives on the board. We build a novel framework to analyze the choice to interlock together with the acquisition of a minority equity stake and study when the two events are observed at equilibrium. We suggest that interlocking directorates may be ancillary to a minority acquisition when the value of the target is private information.

Keywords: Interlocking Directorates; Partial Equity Ownership; Information; Oligopoly

JEL Classification: D4; G3 ; L2