 Tracking stocks are in vogue. And investment ideas have a way of getting in vogue just before they fall flat. Trick or Track? SPRINT SHAREHOLDERS GOT A Christmas present last year: tracking stock in Sprint's wireless division, Sprint PCS. Since then, both parts of Sprint have benefited from the takeover plan by MCI Worldcom, but the little-brother shares are up nearly fivefold, whereas parent Sprint merely doubled. Sprint PCS is a separately traded security that parent Sprint used to "unlock value" in its sexy subsidiary while retaining 100% ownership of the sub. Talk about having your cake and selling it, too. With the parent's heft behind it, the subsidiary now can raise capital by itself: Sprint PCS went on to bag $842 million in a public offering last February. And Wall Street gets an easier-to-understand pure play with its own financial reports primed to attract new investors. Sprint PCS now has its own equity analyst following (32), more than parent Sprint (28). There are more benefits. Tracking stock is good currency to award the sub's valuable employees and for merger deals. U S West paid for Continental Cablevision with its Media Group (now MediaOne) tracking stock in 1995. Cable programmer Liberty Media, now owned by AT&T, has used its shares to engineer $6.6 billion worth of deals since March. Although they've been around since the mid-1980s, trackers are enjoying a popularity spurt in today's insatiable equity market. Of the 25 that are currently traded, 9 have been issued this year. At least another 6 are pending, including issues for Staples (Staples.com) and DuPont (life sciences unit). Total market value of all existing tracking stocks: $160 billion. Unfortunately, tracking stocks are at best a mixed bag (see table). They tend to capitalize on investing fads (recently, dot.coms), and what's hot today might not be hot tomorrow. Last spring, when Internet stocks were sizzling, magazine publisher Ziff-Davis issued a tracker for its ZDNet Web division. ZDNet quickly shot up from $19 to $49. Then reality set in, as has happened to many cyberstocks that lose money, and ZDNet lately has been trading at $23. That's not the only drawback. The most common criticism revolves around corporate governance: Tracking stock subsidiaries seldom have a separate board of directors to look after shareholders' interests. ZDNet investors don't hold a stake in the Web business, but in parent Ziff-Davis. So if a suitor wishes to purchase ZDNet, then ZDNet shareholders can only hope for the best. "It adds a level of complexity," says a Lehman Brothers managing director, Barbara Byrne. And if a poor-performing parent lands in Chapter 11, taking its dynamo of a sub with it, that's too bad for the sub's investors, since the sub is an asset of the parent. The original tracking stock was an "E" class of share that General Motors issued in 1984 to take over Electronic Data Systems. GM later spun EDS off, turning E shares into shares of an independent company. The "H" shares that the automaker issued in 1985 for Hughes Electronics are still a tracker, and are up 553% . Wall Street analysts usually love these things. Ann Miletti, analyst for Strong Capital Management, says options for stock in Go.com, Disney's Internet property, can keep its executives from defecting to rivals like Etoys. But collectively, the trackers' showing has been pretty uninspiring. According to data from Spin-Off Advisors, a Chicago-based research firm, the average overall return on tracking stocks since they each began trading is 30% . This is about a third of the return you'd get by investing in the S&P 500 index at each tracker debut date. Exclude the 1990s' two high-profile winners--Liberty and Sprint PCS--and trackers have inched up an average 5% . Back out GM's Hughes Electronics and they have actually lost 21% . If you do want to try your luck with tracking stock, you should know you can get it in different ways at different times: either as a parent company investor or an outsider. Usually, the first crack at a new tracking stock goes to shareholders in the parent, who receive it as a dividend, as Sprint did with Sprint PCS; later on, with the tracker established in the public markets, the sub can float a second offering to raise more capital. The other way of doing it is Ziff-Davis': Issue all the new tracking shares directly to the public to raise cash now. Only 3 of today's 25 trackers did it that way. One thing to beware of with trackers, though, is the tricky relationship between parent and sibling. Take a look at the Ziff-ZDNet story. Do you think that ZDNet got to use the $230 million it raised in its public offering? Nope. All but $25 million went to pay down debt (now at $1.2 billion) racked up by parent Ziff's magazine publishing operation. That money may have been better spent on the site. During the nine months ended Sept. 30, ZDNet lost $111,000 on $68 million in sales. And don't expect that the parent company's management knows how to run the sub's business. CarMax, the used-car dealer owned by Circuit City, the consumer electronics chain, has a tracking stock. CarMax is barely making money this year and its stock is down 87% since its February 1997 offering. Holding on to both the parent and the tracker isn't always a good idea, even when they are in closely related businesses. A sobering example is paper-and-lumber giant Georgia-Pacific's December 1997 issuance of stock for the division that harvests the wood, called Timber Group. Since then, despite strong demand for lumber from the U.S. construction industry, Timber Group shares are off 3% --even as the parent's stock climbed 37% . If nothing else, you should be skeptical of a tracking stock for the
same reason you should be skeptical of any new issue: The issuer is
going to be the most motivated to issue it when it can be sold for more
than it's worth. These sexy securities can be big winners for investors; they can also hack a hole in your wallet. Take a hard look at a tracker's underlying assets before you leap.
Source: Spin-Off Advisors, LLC. |
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