Corporate control, cooperation, and entry deterrence in direct equity sales

Direct equity sales, in which firms sell blocks of their own equity to other firms, are common but not well understood. This thesis provides two theoretical analyses of the strategic factors that underlie these transactions.; Chapter 1 considers a situation with one firm that may be a profitable future takeover target for two other firms, but whose value in a takeover is currently unknown. The analysis shows that selling equity to one of the potential acquirers before values are learned, and even before a takeover is guaranteed, can increase the partners' expected payoffs at the outside bidder's expense. In the model, this surplus extraction is weighed against inefficient private benefits extraction, which occurs if there is no takeover, to determine the optimal stake size. The model implies that corporate control factors may motivate direct equity sales even when no potential takeover activity is apparent at the time of the sale and when no takeover is observed ex post. The analysis has important implications for stake sales among partner firms in alliances and corporate investments in private firms. The essay develops predictions for the pricing of the block relative to market values and the choice of partner, and provides comparative statics for the optimal stake size and the selling firm's announcement period stock returns.; Chapter 2 models a situation where cooperation with a potential competitor may improve an incumbent firm's efficiency, but allows the partner to learn about the incumbent's technology and possibly become a more effective future entry threat. The analysis shows that the firms can use an equity transfer to deter inefficient future entry when they cannot address the problem via traditional contracting. The equity stake provides a credible, non-contractual commitment not to compete in the future and ensures that mutually beneficial cooperation is undertaken. The model has important implications for equity sales in strategic alliances, corporate venture capital investments, and the organization and financing of research activities. The essay provides results on the stake's pricing relative to market values, derives comparative statics for the stake size, market premium, and announcement period stock returns, and provides a welfare analysis.