Quora Answer: How Do Companies Invest in Each Other?

The following is my answer to a Quora question: “How do companies invest in each other?”

There are several way that a company may invest in another.  The simplest way is to take an outright equity stake in the other company by buying shares in the other company.  By buying a certain number of shares, the investing company can gain a seat of the board of the company invested in.  Such a purchase can either take place over the counter where a company builds its position gradually, or it can be via a direct deal between the boards of both companies. Such a deal involves the transfer of funds or equity instruments such as special share placements.  A company can also take equity in another if the latter is in debt to the former.  The creditor company takes an equity stake in lieu of debt.  But this is only likely if the debtor company is projected to provide a decent return on investment, and the creditor company is taking advantage of the situation.  In such a scenario, funds may not change ownership.

Sometimes, to secure a business proposal, two companies will take equity positions in each other.  This may involve issuing new shares, diluting existing holdings, swapping equity, or variations along these options.  Such a scenario does not typically involve fund transfer.  Another common scenario is when a company, by design, takes a majority stake in a company that is a major shareholder of another company.  This is an indirect way of gaining control of a potential strategic partner or competitor.

As can be seen, in the vast majority of scenarios or their variations, actual funds seldom change hands.  Nobody writes a proverbial cheque.