Real options in equity partnership
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Transcript of Real options in equity partnership
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Real options in equity partnership
Timothy B. Folta and Kent D. Miller
Presenter: Wen ZHENG
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Research Question
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
•Extends a developing literature using option theory to diagnose the motives for incrementally committing to strategies through sequential investment purchase
•Examine acquisitions and equity purchases in existing biotechnology partners by established firms from outside of biotechnology
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Options
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
•Characterize minority investments in partner firms as two-stage compound options (Kogut, 1991)
▫First stage Purchase an option buying an initial equity stake Exercise the option buyout option
▫Second stage Purchase an option further equity purchases Exercise the option growth option
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Options
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
•Characterize minority investments in partner firms as two-stage compound options (Kogut, 1991)
▫First stage Purchase an option buying an initial equity stake Exercise the option buyout option
▫Second stage Purchase an option further equity purchases Exercise the option growth option
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Buyout Options
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
• Options
▫ Holding the option maintain flexibility▫ Exercise the option increase commitment
Control: acquire a major stake
Partial: incremental investment
• Value (Black-Scholes model)
: partner value future cash flow + option value for future growth opportunities
: exercise price organizational expenditure + monetary expenditure
: uncertainty of the partner’s value
: duration length of time the buyout decision may be deferred
: risk-free interest rate (not include in the study)
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Buyout Options
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
• Exercise Condition
▫Early Exercise decisions may be warranted if deferring buyout results in Cash flow or learning sacrifice
Diminished opportunities to preempt rivals
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Hypothesis
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
• ;
▫H1: buyout
▫H2: buyout
▫H3: buyout
▫H4: proprietary buyout
▫H5: proprietary buyout
▫H6: unique buyout
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Data
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
• Dataset
▫ NCBC Actions Database
▫ Bioscan
• Sample
▫ 285 minority equity partnership (1978-1999) 22 were buyout in a majority purchase
122 were terminated by other means (dissolution, etc.)
141 were still in operation at the end of the study’s time period
120 instance of incremental increases in equity
▫ Subfield Therapeutics; diagnostics; agriculture; supplier/specialty chemical
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Model and Method
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
• Event history techniques▫ Buyout events
Acquiring a majority stake Acquiring an additional stake
▫ Hazard rate
▫ Maximum Likelihood There is independence of failure times Not true “cluster” option (Lin and Wei (1989))
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Variables
Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
• Firm Valuation
▫ A stock market index of public firms active in the firm’s technological subfield
▫ A proxy for the ability to attract capital from public markets
• Uncertainty
▫ 26-week standard deviation of weekly returns for each of the four biotechnology
subfield indices
• Proprietary
▫ The log of the number of established firms with equity partnerships outstanding in the
target firms in the previous month
• Control Variables
▫ Nature of option
▫ Nature of the target firms
▫ Nature of the established firms
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
• Lack of overall explanatory power• The theory doesn’t
explain majority-stake buyout
• Inadequate measurement and specification
• Sample size is insufficient
• Uncertainty is significantly negative correlated with the buyout likelihood
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
H1& H3 are supported using subfield value measure
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
H1 & H3
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
H2 is corroborated
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
H4& H5 are corroborated
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
H4 & H5
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
H6 is not corroborated
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Folta and Kim (2002)
Real Options in Equity Partnerships 10/9/2013
Introduction Theory and Hypothesis Research Design Result Discussion
• This paper explores how option theory illustrate the buyout of
research partners
▫ H1-H5 are corroborated, but H6 is not
• This paper recognize the difference between real and financial option
▫ Financial option: delaying commitment is always optimal
▫ Real option: opportunity cost to wait
• Future Research
▫ Address the extent to which real option theory aids in explaining partner
buyouts in other industry contexts, or other types of collaborations, such
as non-equity collaboration
▫ Carefully examine the assumption underlying real option pricing models