Slides by Seth Carnahan, BADM 545, Fall 2009 “Real options in equity partnerships” Tim Folta and Kent Miller 2002 SMJ Slides by Seth Carnahan, BADM 545, Fall 2009

Overview Research question: What influences the decision to purchase additional equity in partner firms in research- intensive industries? Key results: Greater uncertainty motivates firms to purchase additional equity when options are shared The effect of partner firm valuation on the decision to acquire additional equity is stronger when uncertainty is low.

Motivation Delaying commitment is likely optimal for financial options However, for real options, delay might cause the firm to Forgo cash flows Miss opportunities to learn Be pre-empted by rivals

Data and model Universe Two exponential hazard models Data 285 minority equity collaborations between firms outside biotech and US biotech firms initiated between 1978 and 1999 Two exponential hazard models Model 1 DV: Does the partner acquire a majority stake in the biotech firm? Model 2 DV: Does the partner acquire an additional stake in the biotech firm? Data Most biotech firms are private, so many variables must be imputed using data from public biotech firms

Results Hypothesis IV Support Majority stake Addnl Stake 1   Hypothesis IV Support Partner buyouts are more likely when . . . Majority stake Addnl Stake 1 Partner valuation is higher 1) Subfield specific stock index 2) # public offerings in partner's subfield 2 Uncertainty is lower Variance of specific stock index 3 Uncertainty is low and partner valuation is high Interaction 4 The option is more proprietary log(# of other equity investors) 5 The option is less proprietary and uncertainty is high 6 Growth options are more unique # competitors for partner firm

Hypothesis 3 -As uncertainty decreases, firms are more likely to purchase additional stakes in existing partners

Hypothesis 5 -When uncertainty is high, more equity partners increases the likelihood that an existing partner will purchase an additional equity stake

Conclusion The paper asks extremely interesting questions, but data limitations prevent a complete analysis DV in the hypotheses does not map onto paper’s primary analysis Use of sector-specific indices is best solution available, but abstracts away from the theoretical discussion of firm relationships