Tracking stock
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A tracking stock is a security issued by a parent company to track the results of one of its subsidiaries or lines of business. The financial results of the subsidiary or line of business are attributed to the tracking stock. Often, the reason for doing so is to separate a high-growth division from a larger parent company. The parent company and its shareholders remain in control of the subsidiary's or unit's operations.
[edit] Examples
During the dot-com bubble, some companies that predated the bubble identified their Internet operations as high growth divisions that would benefit from a tracking stock. The best-known example is The Walt Disney Company, which issued a tracking stock for go.com. At around the same time as the bubble ended, Disney retired the tracking stock. AT&T (AWE) and Sprint Corporation (PCS) also established tracking stocks for their cellular telephone operations, but neither of these tracking stocks are still outstanding.
As of 2007, one major company in the United States that still has tracking stocks is Liberty Media. Liberty has three tracking stocks, each of which is divided into two classes.
- Liberty Interactive Group (NASDAQ: LINTA,NASDAQ: LINTB)
- Liberty Capital (NASDAQ: LCAPA, NASDAQ: LCAPB)
- Liberty Entertainment (NASDAQ: LMDIA, NASDAQ: LMDIB)
Among other examples, in 1999 Quantum Corp. issued tracking stock in two subsidiaries: its DLT and Storage Systems Group (DSS) and its Hard Disk Drive Group (HDD). Two years later in 2001, Quantum sold the Hard Disk Drive business to Maxtor and redeemed the HDD tracking stock.
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A tracking stock is a specialized equity offering that is based on the operations and cash flows of a a wholly owned subsidiary of a diversified firm. they are hybrid securities, because the subsidiary is not separated from the parent, legally or operationally. The stock simply is entitled to the cash flows of the subsidiary and, therefore, the trading stock trades at a valution based on the subsidiary's expected future cash flows. Managers that issue trading stock believe that stockholder wealth will be maximized by separate valuation of two or more parts of the consolidated group.
