What is Cross Shareholding?

Cross-shareholding happens when two companies own shares in each other. Each company buys and holds a small part of the other company. These ownership stakes create strong ties between the companies. Many companies use cross-shareholding to build lasting business partnerships.

How Cross Shareholding Works

Companies decide to buy shares in each other through mutual agreement. One company might own 5% of another company’s shares, and the second company might own 3% of the first company’s shares. The exact percentages can vary, but they tend to stay under 15%. The shares give each company partial ownership rights in the other company.

The companies have kept these shares for many years. They don’t trade them like regular investors. The point isn’t to make quick money from their rising price. Instead, the shares help bind the companies together in a long-term relationship.

History and Development

Cross-shareholding became popular in Japan after World War II. Japanese companies wanted to protect themselves from foreign takeovers. They also wanted to work together more closely. Big Japanese companies started buying shares in their business partners. These partner companies then bought shares back. This created networks of companies with shared ownership ties.

German companies also embraced cross-shareholding. German banks and insurance companies often owned parts of major industrial companies. The industrial companies sometimes owned shares in the banks, too. This system helped German companies focus on long-term growth instead of short-term profits.

Benefits of Cross Shareholding

Cross-shareholding creates many advantages for companies. The shared ownership makes companies more loyal to each other. They become more willing to help each other through tough times. Stable ownership also protects companies from hostile takeovers.

Companies with cross-shareholding often share information more openly. They trust each other more because they have a financial stake in each other’s success. This helps them work together better on joint projects. They can make longer-term plans without worrying about the partnership suddenly ending.

Cross-shareholding reduces pressure from the stock market. Companies don’t need to focus too much on quarterly profits. They can invest in projects that might take years to pay off. The stable shareholders support this long-term thinking.

Examples in Different Countries

Japanese corporate groups called keiretsu use cross-shareholding extensively. Mitsubishi companies all own shares in each other. This includes Mitsubishi Bank, Mitsubishi Motors, and many others. The shared ownership keeps the group unified.

German companies like Allianz Insurance and Deutsche Bank owned major stakes in many German corporations. Auto companies BMW and Daimler had cross-shareholdings with suppliers and banks. These ownership networks shaped German business culture.

Cross-shareholding exists in other countries, too, but less commonly. French and Italian companies sometimes use it. American and British companies rarely do cross-shareholding. Their business culture focuses more on open market relationships.

Challenges and Criticisms

Cross-shareholding can cause problems. The close ties between companies might reduce competition. Companies might favor their shareholding partners over other businesses. This can hurt companies that aren’t part of the ownership networks.

The system can become too rigid. Companies might stick with old partnerships even when better options exist. Managers might not face enough pressure to improve performance. Stable ownership can make companies slow to adapt to changes.

Cross-shareholding ties up money that companies could use elsewhere. The shares are expensive to buy and hard to sell. Companies might earn better returns by investing that money in their main business operations.

Changes in Recent Decades

Cross-shareholding has declined since the 1990s. Japanese and German companies have sold many of their cross-held shares. Market pressures and new regulations encouraged this change, as companies wanted more flexibility to restructure and merge.

Japanese banks had to sell shares when they faced financial troubles. New accounting rules made cross-shareholdings more expensive to maintain, and many companies decided the traditional system didn’t fit modern business needs.

German banks also reduced their corporate shareholdings. They wanted to focus on global banking instead of controlling German companies. The old networks of cross-ownership gradually broke down.

Modern Forms and Adaptations

Modern cross-shareholding looks different from the past. Companies now prefer smaller ownership stakes. They focus more on specific business partnerships rather than broad corporate groups. The arrangements are more flexible and targeted.

Technology companies sometimes use cross-shareholding. They might exchange shares when forming strategic alliances, which helps align their interests when working on joint technology projects.

Companies in emerging markets have adopted cross-shareholding. Chinese and Korean companies use it to strengthen business relationships. They adapt the practice to fit their local business cultures.

Legal and Regulatory Issues

Laws affect how companies can engage in cross-shareholding. Some countries limit the amount of another company’s shares a business can own. Antitrust regulators monitor cross-shareholding to prevent unfair competition.

Tax rules influence cross-shareholding decisions. Companies must report the value of their shareholdings, and changes in share prices can affect their tax situation. Complex regulations make cross-shareholding harder to manage.

Corporate governance rules have become stricter. Companies must clearly disclose their cross-shareholdings and have good reasons for maintaining them. Shareholders can pressure companies to sell unnecessary holdings.

Role in Corporate Strategy

Companies think carefully about cross-shareholding today. They use it selectively to support important business partnerships. The ownership ties need clear strategic benefits to justify their costs.

Cross-shareholding works best for companies with shared long-term goals. Manufacturing companies might own shares in key suppliers. Banks might own shares in companies they lend to regularly. The ownership supports their ongoing business relationship.

Companies periodically review their cross-shareholdings and sell shares that no longer serve a clear purpose. This keeps the practice focused on valuable business partnerships.

Influence on Business Relationships

Cross-shareholding shapes how companies work together. The shared ownership creates mutual trust and commitment. Companies invest more in joint projects when they own parts of each other.

Management teams meet regularly because of their ownership ties. They share information about their plans and challenges, which helps them better coordinate their business activities.

Cross-shareholding encourages companies to support each other. For example, they might help with funding or technical expertise. The ownership connection makes them more willing to provide this assistance.