The rationale for spin-outs is threefold: strategic, financial and technological.
Strategically, a spin-out allows the parent corporation to become a customer or partner of the unit. It also opens up new channels to global markets for technology in which corporate business units cannot or will not invest.
For the parent corporation, spinning out a unit preserves the option to reacquire or reinvest later when the risk is diminished.
Financially, spin-outs allow for access to high-risk capital funding otherwise unavailable.
Technologically, research and development (R&D) projects that are spun out inspire the culture of entrepreneurship at the parent company, which may lead to an increased speed of innovation.
Additionally, spinning out units is an effective way for the parent corporation to elicit market feedback for R&D projects and thus shape future projection direction.
There has been healthy growth in corporate R&D spending over the years, and more recently it has been higher than more volatile venture capital (VC) spending. A large portion of the technologies developed in corpo-rations are never commercialised either because they cannot significantly affect the parent company’s top or bottom line or because they address opportunities too small for the parent to pursue.
There is compelling evidence that value can be generated through spin-outs. One case study would be printing and copying company Xerox.
Comparisons of the market capitalisation of Xerox and the cumulative market capitalisation of its spin-outs show that the value of the spin-outs was significanty higher than the value of Xerox during most years.In 2000, the market capitalisation of the spin-outs was seven to 10 times greater than that of Xerox itself.
Significate value would have been buried inside Xerox if spin-outs had not been completed. However, corporate managers face challenges in justifying spin-outs. Management findsit difficult to justify generating $1m from the spin-out of an R&D project that required a $50m total investment.
Often, management would try to avoid a spin-out when the parent decides to discontinue or not commercialise an investment. The success of a spin-out might undermine the careers of the corporate executive management team because it could lead to questions such as "who sold this great technology?" and "why was it sold so cheaply?".
Corporate venturing groups can engage in the value creation process of spin-outs by aggregating non-strategic operations groups from other corporations. Corporations often develop strong internal operational capabilities because they cannot find appropriate solutions in the market.
By spinning out and consolidating several non-strategic groups from different corporate parents, an investor might be able to provide cheaper services at a larger scale. Another appeal to this strategy is that the consolidated spin-out would have top-notch clients, the parent and other large corporations, from day one.