Why a Quantum Computing Startup Is Spinning Off From Alphabet

Google parent Alphabet (GOOG -1.10%) (GOOGL -1.23%) has a venture capital and private equity division known as "other bets," which serves as an incubator for emerging companies. In this clip from "The M&A Show" on Motley Fool Live, recorded on March 25, Motley Fool contributors Travis Hoium, Jason Hall, and Dan Caplinger discuss Sandbox, a company from Alphabet's "other bets" segment that's set to be spun off into its own company.

Travis Hoium: Sandbox AQ, as it is called, this is one of Alphabet's "other bets." They have a whole bunch of these subsidiaries that they've basically built to operate as their own company, but they live underneath Alphabet, so they get funding from Alphabet, get a lot of the benefits of being part of a bigger company. They're being spun out to their own private company in part of a nine-figure funding round. Now, I haven't seen a lot of actual details on this. They're keeping this pretty close to the vest, it seems like. We know that Briar Capital, T. Rowe Price Associates, Guggenheim Partners, there's some pretty big names involved in this funding round.

Then Eric Schmidt, who was the former CEO of Google, is going to be their chairman of the board. A big spin out, I think to me that's really what I am trying to wrap my head around is what is the future of all of these other bets within Alphabet? Does this become the standard? Are we going to see Waymo spin out again someday? What are the spin outs look like? This one is not going public today. I think that probably is the plan in the semi-near future but this is a private funding round. This is basically like Alphabet was the seed, the A-series, the B-series venture capital investor, if you will, living underneath Alphabet and now they've raised a bigger round from other investors and brought them into the fold. I presume this also means that Alphabet is going to be the largest shareholder still. It isn't like if you are an Alphabet shareholder, you're still going to get upside from this business, it's just not going to live underneath Alphabet anymore.

It's going to be able to operate on its own. Eventually, this probably makes sense for a lot of their businesses. You don't need to be underneath Alphabet if you're going to be building a business model, hiring employees that want your specific stock, again, another thing that we just talked about, rather than getting Alphabet stock. I think we could see this be something that happens again in the future. Maybe these are public or private rounds like this before companies go public, maybe periodically something will be spun off to a public company. But I think that's the thing that's notable here is that this company, Sandbox, will now be able to grow up on its own without having to go through Alphabet's internal structure.

Jason Hall: I thought it was really interesting in terms of information. I was able to find nothing about the size of Alphabet stake that it's going to retain or any information about that. I went to EDGAR, the SEC search page and there's no SEC filings that have been released by Alphabet about about this whatsoever. Which to me says that whatever their carrying value is, is so small as to not even necessarily be material enough that they feel they need to [laughs] file anything any disclosures with the SEC. I think maybe we wait for the next 10-K in a year and maybe we find out a little bit more if it's become a large enough that they have to disclose that investment. Dan, any insights on that?

Dan Caplinger: Yeah. I don't know, it's interesting. It's a case where you have to be really precise in reading press releases and then news coverage on those press releases because you have spinoff, you have spin out. You have all these different terms that get used. When you hear something like Sandbox to get spun out from Google, I'm like, "Well, gee, if I'm a Google shareholder, that's great. If I'm an Alphabet shareholder, now I get shares of Sandbox." It's like, "No, sorry." It may happen in the future like Travis is saying, if Alphabet keeps a stake then they will have a stake, and if Sandbox eventually goes public, then at that point Alphabet will have the choice. It can either hold the shares on its balance sheet or it can decide, "Hey, we're just going to pay those out in a distribution to Alphabet shareholders. Each Alphabet shareholder get X number of Sandbox shares." But that's not happening now. It's not going to be a public stock.