Strategic Stake Acquisitions in Rival Firms: Common vs. Cross-Ownership

We study how a blockholder who controls a firm should acquire a minority stake in a rival: directly, creating common ownership, or indirectly through the controlled firm, creating cross-ownership. Common ownership generates stronger internalization of competitive externalities and allows the blockholder to capture the resulting gains without sharing them with dispersed shareholders. However, it may also create conflicts of interest with minority shareholders that can lead to a loss of control. Cross-ownership avoids this governance risk but internalizes competition less effectively. We characterize how the optimal acquisition mode depends on the nature of product market competition and the strength of corporate governance.