What Is Cross Holding?
Cross holding is a situation in which a publicly-traded corporation owns stock in another publicly-traded company. So, technically, listed corporations own securities issued by other listed corporations. Cross holding can lead to double-counting, whereby the equity of each company is counted twice when determining value, which can result in estimating the wrong value of the two companies.
- Cross holding happens when a publicly-traded company owns a stake in another publicly-traded company.
- The biggest issue with cross-holding is that the value of equity for each company is double-counted, leading to a wrong valuation.
- Critics also argue cross-holding hinders the effort to improve corporate governance and hold management teams accountable.
How Cross Holding Works
Companies that have cross-holdings, also known as cross-shareholdings, are susceptible to confusion and management holdout in cases of company mergers and acquisitions (M&A) because one company might refuse consent to the other, and vice versa.
Markets in Britain and the U.S. have long enjoyed capitalism marked by a dispersed base of owners. In continental Europe, by contrast, ownership tends to be concentrated among a tight unit of insiders. The reasons differ from country to country. In France, it’s a combination of the state’s wish to see big business in friendly hands and the lack of institutional investors.
Elsewhere, savvy dealing with dynasties such as Sweden’s Wallenberg and Italy’s Agnellis have played a bigger role. Until recently, it was difficult to know just how closely held Europe’s companies were, because disclosure standards were lax. New and tougher standards, are making things clearer.
In Japan, the keiretsu is a long-standing tradition of companies with interlocking business relationships and shareholdings. As an informal business group, member companies own small portions of the shares in each other’s companies. This system helps insulate each company from stock market fluctuations and takeover attempts, thus enabling long-term planning in projects.
Criticism of Cross Holding
Critics contend the practice of building cross or “strategic” shareholdings between listed corporations contributes significantly to the docility of shareholder registers, the complacency of failing management teams, and the difficulty of building real momentum behind the push for better stewardship and corporate governance. Shareholders pushing for improved corporate governance standards are increasingly asking for more detailed outlines of the economic rationale for cross-holdings.
Also, if Company A holds stocks or bonds in Company B, the value of this security might be counted twice, in error, because these securities would be counted when determining the value of the company issuing the security, and again when looking over the securities held by the other company.
Example of Cross Holding
An example of cross-holding is Warren Buffett’s Berkshire Hathaway (BRK-A). Berkshire invests in various publicly traded companies as part of its business strategy. As of the third quarter of 2022, Berkshire’s largest equity holdings are: Apple (AAPL), Bank of America (BAC), Coca-Cola (KO), American Express (AXP), and Chevron (CVX). Berkshire’s largest holding is Apple — it owns over $125 billion worth of stock. Berkshire also owns $12.4 billion, or over 26% of outstanding shares of The Kraft Heinz Company (KHC) common stock.
What Are the Advantages of Cross Holdings?
For companies that advocate for the practice, the argument is that it can provide financial support and additional stability to both companies. Each company has an interest in the financial success of the other.
The company that has its shares cross held by other companies may also be protected from a hostile takeover, due to the dispersion of the shares.
What Are the Disadvantages of Cross Holdings?
A company’s valuation is at risk of being inaccurately measured when it cross holds other publicly-traded companies, creating confusion for investors.
Additionally, some critics say that cross holding is a poor use of a company’s capital that would be better served by being invested in expanding the company’s business.
What Is Reciprocal Cross Holdings?
Reciprocal cross holdings is when two companies own each other’s shares. It’s a practice that is more common in Japan and parts of Europe than in the United States.