Tracking Stocks: Definition, Strategies, and Real-world Examples
SB
Summary:
Explore the world of tracking stocks with our comprehensive guide. From understanding the basics to weighing the benefits and risks for both investors and companies, this article dives deep into the intricacies of tracking stocks. Discover how these specialized equity securities allow investors to access promising business segments and help companies raise capital. Learn from a real-world example involving the Walt Disney Company’s internet holdings division. Whether you’re an investor seeking targeted opportunities or a company considering this financial strategy, this guide has you covered.
What is a tracking stock?
Tracking stocks represent a unique equity offering by a parent company, designed to mirror the financial performance of a specific segment or division. Issued separately from the parent company’s stock, tracking stocks enable larger corporations to isolate the financial results of high-growth segments. Investors, in turn, gain exposure to a specific aspect of a larger business, such as a mobile division within a telecom provider.
Understanding tracking stocks
When a parent company issues a tracking stock, the financials of the designated division are separated from the parent company’s statements. The tracking stock’s performance is linked to the success of the division it tracks, independent of the overall company’s performance. This strategy allows companies to raise capital and investors to focus on specific divisions.
Registration and Reporting
Tracking stocks follow similar registration processes as common stocks, adhering to regulations enforced by the U.S. Securities and Exchange Commission (SEC). Companies include a dedicated section for tracking stock and the financials of the underlying division in their reports. While tracking stocks were more common in the late 1990s, some companies still utilize them today.
Benefits and risks for investors
Investors can leverage tracking stocks to access promising segments of larger businesses, catering to their risk tolerance. However, it’s crucial to be aware of the associated risks, such as limited or no voting rights and potential losses if the parent company struggles. Despite these risks, tracking stocks can offer valuable opportunities for targeted investments.
Benefits and risks for companies
For companies, issuing tracking stocks provides a means of raising capital, gauging investor interest in specific segments, and avoiding the need for separate legal entities. Yet, the strategy may also entail the risk of separating vital parts of the company, impacting overall performance.
Pros and cons of Tracking Stocks
Example of a tracking stock
In 1999, the Walt Disney Company issued a tracking stock for its internet holdings division, Go.com. Go.com’s websites included ESPN.com, ABCNews.com, Disney Online, and Disney’s Daily Blast. The tracking stock traded under the ticker symbol “GO.
In January 2001, just as the tech bubble was popping, Disney was forced to close Go.com, lay off hundreds of employees, and retire the tracking stock permanently.
Other considerations when investing in tracking stocks
While tracking stocks offer unique opportunities, investors must consider various factors before diving in. Understanding the following aspects can enhance your decision-making process:
Risk management
Effective risk management is crucial when investing in tracking stocks. Since the performance is closely tied to the tracked segment, fluctuations in that division’s financial health can have a significant impact on the tracking stock’s value. Investors should assess the overall risk tolerance and carefully evaluate the financial stability of the specific division.
Market trends and industry analysis
Investors should stay informed about market trends and conduct thorough industry analysis, especially related to the specific segment tracked by the stock. Changes in technology, consumer behavior, or industry regulations can influence the division’s performance and, consequently, the tracking stock’s value.
Real-world success stories with tracking stocks
Examining successful cases of companies utilizing tracking stocks provides valuable insights into the potential benefits and strategies involved. Learn from these real-world success stories:
Liberty Media Corporation’s Tracking Stocks
Liberty Media Corporation, a media conglomerate, implemented tracking stocks to unlock the value of its diverse holdings. By issuing separate tracking stocks for Liberty Interactive and Liberty Ventures, the company aimed to provide investors with more targeted investment opportunities in its QVC and digital commerce assets.
Microsoft’s tracking stock for expedia
In the late 1990s, Microsoft issued a tracking stock for Expedia, its online travel platform. This move allowed Microsoft to highlight the value of Expedia’s success independently. The tracking stock provided investors with a way to specifically invest in the booming online travel industry.
Conclusion
In conclusion, tracking stocks present a dynamic investment strategy, offering both investors and companies unique opportunities. Investors can access promising divisions of large corporations, tailor their investments to specific risk tolerances, and potentially benefit from the success of targeted business segments. However, it’s crucial to approach tracking stocks with careful consideration of associated risks, such as limited voting rights and vulnerability to the financial health of the tracked division.
For companies, issuing tracking stocks can be a strategic move to raise capital, gauge investor interest in specific segments, and avoid the complexities of creating separate legal entities. Real-world examples, including Liberty Media Corporation and Microsoft, showcase successful implementations of tracking stocks to unlock and highlight the value of specific business divisions.
Frequently asked questions
What is the primary purpose of issuing tracking stocks?
The primary purpose of issuing tracking stocks is for a parent company to isolate and track the financial performance of a specific segment or division separately from the overall company. This allows investors to gain exposure to targeted business segments.
Do tracking stocks come with voting rights for investors?
Typically, tracking stocks come with limited or no voting rights for investors. This means that investors may not have a say in the decision-making processes of the tracked segment, and their influence on corporate matters may be restricted.
How are tracking stocks registered and reported?
Tracking stocks are registered similarly to common stocks, following the regulations enforced by the U.S. Securities and Exchange Commission (SEC). Companies include a separate section in their financial reports dedicated to tracking stocks and the financials of the underlying division.
What are the potential risks for investors when dealing with tracking stocks?
Investors in tracking stocks face various risks, including potential losses if the tracked division performs poorly, limited or no voting rights, and the possibility of creditors having a claim on the tracking segment’s assets in the event of the parent company’s bankruptcy.
Are tracking stocks still commonly issued by companies today?
While tracking stocks were more common in the late 1990s, some companies still issue them today. However, the frequency of their issuance has decreased, and companies may choose alternative financial strategies to achieve similar objectives.
Key takeaways
- Tracking stocks provide investors access to promising divisions.
- The performance of tracking stocks comes solely from the tracked segment, not the parent company as a whole.
- New issuance of tracking stocks offers companies capital to pay down debt and fund growth.
Share this post: