|  With
the recent rebirth of proposed tracking stock issuances (i.e. AT&T and WorldComm's
proposals), let's take a look at what a tracking stock is and why companies issue
them:
What is It?
Essentially
a tracking stock is nothing more than a stock that the company who issues it HOPES
will be viewed by the market as its own company to command its own valuation.
Unlike a full spin-off to investors, the company which is being 'tracked' is oftentimes
controlled by the mother company's board and senior management, and is 100% owned
by the mother unless a portion was sold to the public in an IPO. The mother company's
intention is to show operations of another part of its company distinct from its
main operation in an effort to make a company's various operating units easier
to value. For example, AT&T 'made believe' that
its AT&T Wireless was its own company and separated it out from AT&T for reporting
purposes. With or without the tracking stock, AT&T will look the same in terms
of its income statement and balance sheet because technically all of the Wireless
company's profit/loss flows back through AT&T, as it would even if the Wireless
tracking stock did not exist. The intention, however, using this example, is that
because wireless stocks generally command a higher multiple (i.e. premium valuation)
than long distance providers, AT&T could separate the wireless out and show the
market how Wireless is doing as a standalone, with the intention of having that
part of the business rewarded as such. How Does it Benefit the Mother Company?
Developing a tracking stock to represent an arm of the parent company
has several implications: For example, if the tracking entity gets
valued as the mother company intends, those shares can be used for acquisitions.
Continuing with the AT&T Wireless example, let's assume they approach a small
niche wireless player for an acquisition. The small wireless company might want
to sell, but may be reluctant to accept AT&T shares as currency for fear AT&T
is viewed too much as a stodgy long distance company and may not realize much
value for them and their hard work building their small wireless franchise. However,
if AT&T can offer AT&T Wireless shares which will be viewed in the market place
on their own, the small wireless company may be now willing to sell and the Wireless
unit now has a currency to pay for acquisitions. Secondly, the availability of shares
in the tracked unit can also serve as currency for stock options to reward and/or
attract employees. The last thing an employee wants is to get options on a company
suffering from something they have nothing to do with and to have their hard work
masked by the operations of the mother company. Using our example, AT&T could
offer options to its wireless staff in shares of AT&T Wireless, rather than the
AT&T shares. What's The Value?
So,
this begs the question is it a phantom stock? The answer, in typical finance speak,
is Yes and No! It is a phantom in that you are not receiving any economic interest
in the tracking entity because technically all the money it makes, or doesn't
make, goes back to the mother. So, unlike buying a typical stock, you do not own
the company represented by the tracking stock, the mother still owns 100%—technically.
BUT,
on the other hand, you can look at it like the parent company believes its other
operations are not being valued appropriately, so by separating out a division
and allowing it be valued distinctly, the intention is the true value can be recognized
as the sum of the market values of the parent company and the tracking unit. This
is the definition of unlocking value. Continuing on our example, Wireless and
AT&T are really one company, so as one (i.e. AT&T) AT&T felt it was UNDERVALUED
because the market was ignoring the wireless unit and just valuing AT&T as a long
distance company, but combining the market value of Wireless tracking stock with
AT&T might be more representative of the true value of AT&T.
Miscellaneous
Unfortunately,
the market and investors have become so impatient in recent years and demand value
now. Management is often forced to make dramatic decisions without regard for
the company's own benefit. Tracking stocks are often contemplated as an effort
to "add value", but often take their effect initially, upon announcement,
and then lose their luster. In fact, of the 30 or so tracking stocks now in the
market, very few are living up to the expectations of the parent. The intentions
are usually very grand, but in many instances, the benefits to the everyday investor
are often few and far between, or simply never realized. If you are interested
in a tracking stock, be sure to consider each individual stock on its own merits,
and don't necessarily assume one company's method of issuing a tracking stock
applies across the board.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. |
