Partial Acquisitions and Dilution of Minority Shareholders' Wealth

We study horizontal partial ownership arrangements in an oligopolistic industry in the absence of synergies. Contrary to existing results, we find that a dominant shareholder may choose to acquire shares in a competitor although the aggregate profit of the two firms is reduced. This is due to a favoritism effect: after the acquisition, the dominant shareholder will favor the firm in which he holds the relatively higher share to the detriment of shareholders of the other firm. This dilution of property rights is reflected in the value of shares when the acquisition is launched, which explains its private profitability for the dominant shareholder