Optimal Equity Stakes and Corporate Control

I show that firms may optimally sell blocks of their own equityto other firms in anticipation of future corporate control activity.In the model, a target and one potential acquirer, who may alsobe an alliance partner, can negotiate before synergy valuesare learned. I find that equity implements an optimal mechanism,allowing the partners to extract surplus from outside bidderswho may arrive later. The stake is limited by the outsiders'willingness to investigate. The results imply that corporatecontrol may motivate an equity sale even when no takeover activityis apparent at the time or occurs ex post.