1. Research Notes and Commentaries Real Options in Equity Partnerships
Timothy B. Folta and Kent D. Miller (2002)
Strategic Management Journal

2. Research Questions and Gaps
Why collaborations sometimes end in acquisitions of partners?
Whether option theory is useful for predicting sequential equity commitments in partner firms?
What are the effects of external uncertainty on equity purchase?
Research gaps
Buyouts of research partners have not been explained by previous research
Neither main nor moderating effects of uncertainty have been explicitly examined in prior empirical real option research with the field of strategic management

3. Two-stage Compound Options (Kogut 1991)
Valuable information & contractual, operational ,managerial links
Controlling interest
$ initial equity stake
Call option
$$$ Further investment
Growth Option (2nd stage)
Buyout Option (1st Stage)
$$$ Invest to expand

4. Theory and Hypotheses When to exercise an option?
Black-Scholes (1973) model: valuing the partner buyout option
Option will be exercised when the value of the underlying asset (S) exceeds the exercise price (X) by more than the value of holding the option (C):
𝑆−𝑋=𝐶(𝑆,𝑋,σ,𝑇)
S: $(NPV + Option)
X: $(exercise option)
C: $(holding the option)
σ: uncertainty of S
T: the time length of deferral

5. Exercise Buyout Option
Theory and Hypotheses
Increased partner $(NPV +current learning opportunity + future growth opportunity )  buyout H1 H2
High uncertainty  buyout less likely H3
Exercise Buyout Option
low uncertainty + high $  buyout H4
More proprietary  buyout H5
High uncertainty + less proprietary  buyout (preempt rivals)
Growth options more unique (fewer rivals) buyout (technology substitutability) H6

6. Theory and Hypotheses high uncertainty H5 high H4 Proprietary H2 H3 H1
valuation
low
high

7. Research Design
Data
The North Carolina Biotechnology Center (NCBC) Actions Database and Bioscan
4 subfields: therapeutics, diagnostics, agriculture, and supplier/specialty chemical
285 minority equity partnerships (22 terminated by purchases the ownership level to 50% 87 dissolved, 35 acquired by 3rd parties, 141 still in effect at the end of 1999 )

8. Research Design Model & method Two different kinds of buyout events
Method: maximum likelihood using STATA
Two different kinds of buyout events
1st dependent variable: hazard rate of acquiring a majority stake (“1”  ≥50%)
2nd dependent variable: hazard rate of acquiring an additional stake (“1”  any purchases of equity after the initial ownership level)
λ 𝑡 = lim 𝑞 𝑡,𝑡+∆𝑡 ,∆𝑡→0
λ 𝑡 =exp⁡( 𝛼 ′ 𝑋 𝑡 )
q: discrete probability of an event between t and 𝑡+∆t
λ 𝑡 : an exponential function of independent variables
𝑋 𝑡 : a vector of parameters capturing the effects of the variables on the rate of subsequent equity investment

9. Variable measurement Firm value Uncertainty Proprietary
Difference in the number of public offerings since the initiation of the equity partnership
Uncertainty
26-week standard deviation of weekly returns for each of the four biotechnology subfield indices
Proprietary
Number of equity partners: the log of he number of established firms with equity partnership outstanding in the target firm in the previous months
Number of rivals: total number of firms having stated their involvement in any of Bioscan’s 123 biotechnology product areas
Control variables
License (1,0)
Option (1,0)
The number of commercial alliances
The number of private equity placements
The number of biotechnology sectors
Firm age
Alliance experience of the established firm

10. Empirical Results
Contl() H2 H4
H6 is not supported H3 H5

11. Empirical Results
H1 and H3 are supported using the subfield value valuation measure, but not using the number of public offerings valuation measure
low uncertainty
Sample mean
High uncertainty

12. Empirical Results
The likelihood of partial buyouts decreases steeply for low uncertainty, but the rate of acquiring additional equity increases for high uncertainty  H4
High uncertainty
Sample mean
low uncertainty

13. Conclusion Conceptual level Empirical study
Although delaying commitment is optimal for financial options, there may be opportunity costs to waiting to exercise real options – firms may forgo cash flows or opportunities to learn, or they may be preempted by rivals
Nonproprietary  strong incentive to exercise an option, particularly as the underlying growth option becomes more valuable
Empirical study
Partner buyouts are more likely with lower uncertainty
Firm valuation(reflected in subfield value) has a strong positive effect on the decision to bur more equity in the partner, and even stronger in the present of low uncertainty
More proprietary + low uncertainty more likely to exercise a buyout option
More shared Buyout options + high uncertainty  quicker buyout decision
Moderating role of uncertainty in preemptive buyout decisions: firms appear to move quickly to capture the value associated with nonproprietary options as uncertainty increases

14. Discussion
In the empirical explanation part, the paper used subfield value to represent for the firm value, which is different from the previous statement of measurement, but the empirical result shows that by using the number of public offerings * uncertainty has statistical significance, so I would like to see the authors offer more information about the result and the measurement change.