Rare was sold because
1. Inefficieny. I know this is rich coming from Nintendo, but Rare was gradually getting slower and slower at releasing their games, considering their size and talent. There was a huge gap between Conker and SFA, which were the last two projects from Rare, and I think Nintendo had had enough.
2. Talent. Rare wasn't quite the team it was during its peak (Goldeneye/BK days) as most of the team had moved on to other projects and companies.
Overall, I think it was a smart move. Compare the output of Retro Studios and Silicon Knights, which are both second parties of Nintendo, to that of Rare now that it has moved to the Microsoft Game Developers place, and its evident that Nintendo won in the short term. But the real winner won't be obvious until the next generation of consoles is released- around this time I think Rare will be alot more efficient with its funding and support from MS, so it will be interesting.