Spinoffs versus Buyouts: Profitability of Alternate Routes to Commercializing Innovations

Abstract

This research compares the profitability of two innovation-related divestitures: spinoffs versus buyouts. Innovation-related divestitures are units created with the intent of better developing and marketing innovations in new or existing markets. We study the profitability of spinoffs’ and buyouts’ in the short and medium term using longitudinal data on 126 spinoffs and 102 buyouts over 5 years. The main findings are: First, spinoffs and buyouts have similar profits in the first two years after divestiture; afterwards buyouts have much higher profits than spinoffs. Second, strategic emphasis or the investment in R&D versus marketing, is the central, causal mechanism that explains the profitability of spinoffs’ and buyouts’ over time. Third, divestiture type influences performance through two routes: a one-step mediated effect via strategic emphasis; and a two-step mediated effect via strategic emphasis and radicalness. The two routes have opposite effects on performance. Fourth, the mechanism of effect is the following. Under debt-holders’ pressure to maximize immediate returns, buyouts start their life with a strict emphasis on marketing investments at the expense of R&D investments. On the contrary, in the absence of such pressure, spinoffs initially emphasize R&D over marketing more than buyouts. The critical difference between the two divestiture types emerges from the third year on. While spinoffs’ strategic emphasis remains stable, buyouts gradually emphasize R&D over marketing increasingly over the years as they repay their debt.