Tracking Stocks

Companies create these stocks to track the fortunes of one or more or their subsidiaries.  We view tracking stocks as distant cousins to spin-offs.  Unlike a spin-off where a division is separated from the parent, goes public, and has complete autonomy financially and managerially from the parent company-tracking stocks represent shares that are still joined at the hip to the parent (there is no legal separation of the assets or liabilities). 

The parent and tracking stock operate under one management team and one board of directors, even though the tracking stock’s finances are reported separately from the parent.  Companies issue tracking stocks to hopefully unlock value in their underlying subsidiary.  Tracking stocks have some advantages (to the issuer) over spin offs. 

Issuing tracking stocks is always a tax-free procedure and if either of the two units were losing money, the earnings from one would offset the losses of the other for tax purposes.  Borrowing costs for the tracker are usually lower because it relies on its parent’s higher credit rating.  Overhead costs are lower than if the two were separate.  If synergies exist between the parent and the tracker, there are added benefits.  As with spin-offs, the biggest reason for issuing tracking stock is the potential to goose the parent’s stock price. 

Companies often feel that Wall Street analysts and investors incorrectly value captive subsidiaries that are overshadowed by the parent.  So investment bankers tell them that the creation of a tracking stock highlights “pure-plays” that can be valued higher by the market.  This may prompt separate analyst coverage, and entice a different set of shareholders for the company.  Tracking deals are our least favorite restructuring technique. 

Tracking stocks have inferior shareholder rights and the potential for serious conflict of interest issues.  We believe the biggest drawback with tracking issues is that they are immune from takeovers.  From an investor’s point of view, we would prefer to “own the thing that owns the thing”.