What is spin-out vs. a spin-in?
Both spin-out and spin-in have to do with how a parent company interacts with new ventures. A spin-out (also called a spin-off) is a corporate action where a company turns a venture into a separate legal entity, with its own management system, and different (though often overlapping) owners. Spin-ins refer to existing external innovations / ventures or internal ventures that become integrated to the company. If the source of the spin-in is external this occurs via contracting, licensing or acquisition.
How does a spin-out work?
Spin-outs usually come from internal initiatives that receive external funding for stand-alone support. The spin-out takes with it the venture’s operations assets, intellectual property, talent, and liabilities. The new entity can raise its own capital and operate its own business strategy. The ultimate goal of a spin-out is to increase shareholder value. By creating a smaller, independent venture, companies can implement bespoke management systems, streamline processes, and eliminate unnecessary hurdles. The process of spinning out can take anywhere from six months to over two years to execute even if the company is investment ready.
How does a spin-in work?
Spin-ins work with the parent company to collaboratively develop a commercial opportunity in return for an equity stake. Ownership of the innovation lies with the team that created the venture; they are accountable for developing the innovation. Spin-ins often have access to the customers, intellectual property, and assets of the parent company. If spin-in performance meets the expectations of the parent company, the company may invest further or integrate the innovation into existing businesses.
What is the difference between a spin-off vs. split-off vs. spin-out or carve-out?
There are 4 different ways companies can divest a venture:
- Spin-off (pure play): Company distributes shares of the subsidiary to existing shareholders.
- Tracking Stock. Tracking stocks represent shares that are still a part of the parent; the companies share a common management team.
- Split-off: Shareholders must choose between shares in the new subsidiary or the parent company.
- Spin-out (Carve-Out): The company sells shares in the new entity in an Initial Public Offering (commonly an interest of <20%). No shares are given to or exchanged with existing shareholders.
Why do spin-outs and spin-ins occur?
Both spin-outs and spin-ins occur when companies need to adjust their portfolio of ideas or businesses. Spin-outs occur either because the value of the spun-off company is expected to be more as an independent entity than as part of a larger company, or the spin-out may be a distraction to the core- underperforming, or not aligned to its priorities. Spin-ins help parent companies decrease their innovation risk; innovations that are fully formed are easier for companies to quickly apply and scale, and they can pick and choose from existing innovations that already have independent resources allocated to them.
What is the difference between a firm acquiring a company and a spin-in?
An acquisition is different from a spin-in. An acquisition of a venture occurs when all or part of a venture is purchased by another company and a change of control occurs. For a spin-in, although new shares of a company stock are issued, the parent company is viewed as providing additional funding to the venture so it can grow. In addition, spin-ins can come from internal innovation teams usually in for the for of integration into a Business Unit.
What are the drawbacks of a spin-out?
There are drawbacks of Spin-outs because they often require substantial management time and distract executives from the core business, and there can be significant transaction expenses. Another downside is that their share price can be more volatile, despite long term potential. Shareholders and investors may not want the venture sold off, and employees may be distressed to separate from the parent company. Spin-outs also can eliminate the ability of the parent company to draw/report profits from the stand-alone venture with other shareholders.
What are examples of spin in / spin-out in corporate innovation?
An example of a spin out is when Chipotle Mexican Grill was spun out of McDonald’s in 2006, so that McDonald’s could focus on its core business. Another recent example of a spin in includes the 2015 spin-out of PayPal from its parent company eBay. An example of a spin-in from internal efforts is Amazon’s AWS business unit.