Spinoffs Versus Buyouts: Profitability of Alternate Routes for Commercializing Innovations

This research compares innovation-related spinoffs and buyouts. Innovation-related divestitures are companies created with the intent of better developing and marketing new products in new or existing markets. We investigate how and why spinoffs’ and buyouts’ strategic emphasis, radicalness of products, and profits diverge over time. Using longitudinal data on 126 spinoffs and 102 buyouts over 5 years, this study provides three critical findings. First, spinoffs and buyouts have similar profits in the first two years after divestiture; afterwards buyouts have much higher profits than spinoffs. Second, 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. Third, strategic emphasis is the central, causal mechanism that generates heterogeneity in the evolution of spinoffs’ and buyouts’ performance.