A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that company. By issuing a tracking stock, the different segments of the company can be valued differently by investors.
For example, if an old-economy company trading at a P/E of about 10 happens to own a wildly growing internet business (not too common these days), the company might issue a tracking stock so the market could value the new business separately from the old one (hopefully at a P/E of at least 100). Those high-flying stocks are awfully useful for making employees rich, and that never hurts recruiting. Here’s a real-world example. The stock for Hughes Electronics (ticker symbol GMH) is a tracking stock. This business is just the satellite etc. division of General Motors (ticker symbol GM).
A company has many good reasons to issue a tracking stock for one of its subsidiaries (as opposed to spinning it off to shareholders). First, the company gets to keep control over the subsidiary (although they don’t get all the profit). Second, they might be able to lower their costs of obtaining capital by getting a better credit rating. Third, the businesses can all share marketing, administrative support functions, a headquarters, etc. Finally, and most importantly, if the tracking stock shoots up, the parent company can make acquisitions and pay in stock instead of cash.
When a tracking stock is issued, the company can choose to sell it to the markets (i.e., via an initial public offering or IPO) or to distribute new shares to existing shareholders. Either way, the newly tracked business segment gets a longer leash, but can still run back to the parent corporation if times get tough.
All is not perfect in this world. Tracking stock is a second-class stock, primarily because holders do not have the same voting rights as holders of the main stock. Each share of tracking stock may have 1/2 or 1/4 of a vote; in very rare cases, holders of tracking stock have no vote at all.
The following resources offer more information about tracking stocks.
- The Motley Fool wrote about tracking stocks on 7 September 1999.
http://www.fool.com/specials/1999/sp990907tradingstocks.htm
Article Credits:
Contributed-By: Chris Lott