1. Real Options in Equity Partnership Timothy B. Folta and Kent D.Miller SMJ,23; 77 - 88 ( 2002)

2. Introduction O To maintain efficiency and speed, companies join partner firms having expertise in R& D. O Simultaneously, scholar debate whether R&D - sourced though collaborative or acquisition. O Partnership transition toward acquisition – lack theoretical and empirical attention. O Partnership termination ignore partnership acquisitions or combine buyouts (CB). O This study examines CB by developing literature using real options theory (Kogut, 1991 etc.)

3. Continue: O Extend the real option theory to strategy in two ways. O Focus on Joint venture acquisition – examine buyout and equity purchase of partner firms subsequent to initial minority equity stakes. O Examine the effects of external uncertainty - both directly and combination with other variables – on equity purchases. O Uncertainty refers to the unpredictability of the internal and external environment and risk refers to performance volatility.

4. Theory and Hypothesis O In the line with Kogut ( 1991), the current paper also focuses on joint ventures – Investment with partner firm as two stage compound options. O 1 st stage – the buyout option,occuer when the firm makes further equity purchases granting a controlling interest in the partner. O 2 nd stage – the growth option – involve one or more likely several discretionary investment to expand the business. O Black – Scholes ( 1973) models provide starting point about key variable relevant to valuing partner buyout. O C = f ( S,X,sigma,T,r)

5. Hypotheses O H1: Increased partner valuations makes buyout more likely. O H2:High Uncertainty makes partner buyout less likely. O H3: When low uncertainty is combined with high valuation, partner buyouts are more likely. O H4:When buyout options are more proprietary ( i.e., there are fewer equity partners associated with the target firms),partners buyout is more likely. O H5: Under high uncertainty, the less proprietary a buyout option the more likely is partner buyout. O H6:When growth options are more unique (i.e., fewer rivals in product market) partner buyout is more likely.

6. Model and Method O North Carolina Biotechnology Center Action Data based and Bioscan. O Restricted sample to four sub fields (Names) O 337 equity collaboration between 1978 and 1999,Identified. O Two buyout events. O DV – hazard rate of acquiring a majority stake coded “1”. Raise ownership level at 50%. O 2 nd set …….additional stake “1”.Raise beyond 50%. O Independent Variables O Firm valuating, exogenous uncertainty and option is proprietary.

7. Pairwise correlation coefficient

8. Results

9. Graph 1 & 2

10. Results explanation O Acquisition of majority stakes O Model 1 and 2 have hypothesized independent variable without Interaction terms. O Main conclusion is that we do not have an overall significant effect associated with our theory driven relations for acquisition of majority stakes b/c O Theory does not explain majority stake buyout O Our measure or specification is inadequate O Out sample size is insufficient.

11. Results explanation O Acquisition of additional stakes O Model 3 & 4 is baseline and includes main effect respectively. Model 5 introduced hypothesized interaction involving uncertainty. O H1&3: received support using subfield value valuation measure but not using number of public offering s valuation measures. O H2: expected acquisitions of additional equity stakes to be more likely in the present of low uncertainty. O H4&5: corroborated O Only H6 is not corroborated.

12. Graph explanation O Figure 1(a) illustrates the effects of subfield value over the variable’s range at three levels of uncertainty: O The mean of uncertainty for the entire sample, the mean uncertainty plus a standard deviation, and the mean uncertainty minus a standard deviation. O Also increases in subfield value had a greater impact on the rate of additional equity purchases for low levels of uncertainty. O Figure 1(b), shows effect of number of equity partners at different levels of uncertainty. O Means number of equity partners has an overall negative effect on acquiring additional equity.

13. Conclusion & Discussion O Buyouts of research partners occur frequently, but have not been explained by previous research. O At conceptual level, minority investment in partner firms do not provide investing firms propriety options. O In the empirical portion, we tested several relations not previously examined in the real option literature. O Future research to address real option theory aids in explaining partner buyouts in other industry contexts, or other types of collaborations, such as nonequity collaboration (Folta & Leiblein, 1994).