Tracking stock

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Tracking stock

Best defined with an example. Suppose Company A purchases a business from Company B and pays B with 1 million shares of A's stock. The agreement provides that B cannot sell the 1 million shares for 60 days, and also prohibits B from hedging by purchasing put options on A's shares or short-selling A's shares. B is worried that the market may fall in the next 60 days. B could hedge by purchasing put options or selling the futures on the S&P 500. However, it is possible that A's business is much more cyclical than the S&P 500. One solution to this problem is to find a tracking stock. This is a stock that has high correlation with A. Let us call it Company C. The solution is to sell short or buy protective put options on this tracking stock C. This protects B from fluctuations in the price of A's stock over the next 60 days. Because the degree of the protection is related to the correlation of A and C's stock, it is extremely unlikely that the protection is perfect. Multidivisional firms have used a form of restructuring called tracking stock since 1984 to segment the performance of a particular division -- similar to a spin-off or carve-out, except that the parent firm does not relinquish control of the tracked division. Previously, this was known as alphabet stock, but the technically correct name is tracking stock (e.g., EDS traded for years as a tracking stock of GM). This is a way to reward managers for good divisional performance with an equity that is tied to their division-rather than potentially penalizing them compensation for bad performance in a division they have no control over.

Tracking Stock

A stock in a department (but not an independent corporation) of a publicly-traded company. For example, a company may issue tracking stock representing its new green energy division. A tracking stock allows the company to gauge the performance of a new or untested product or department while still maintaining control over it. They were common during the dot-com bubble, as established companies formed internet divisions and wished to observe their performance.

tracking stock

A common stock that provides holders with a financial interest in a particular segment of a company's business. Essentially, a tracking stock is a proxy for the value of the subsidiary if it were independent and publicly traded. Tracking stocks are generally issued by corporations that feel their firms are not being fully valued by investors.
Case Study In April 2000 General Motors Corporation offered owners of its $1 2/3 par value common stock an opportunity to exchange each of their shares for 1.065 shares of the firm's class H common stock. The company stated it would accept tenders of up to 86,396,977 shares, or approximately 14% of its outstanding common stock. Class H common was a tracking stock designed to provide holders with financial returns based on the financial performance of GM subsidiary Hughes, which General Motors would continue to control. Dividends to class H shareholders depended on the portion of Hughes's earnings allocated to the class H stock. Hughes's earnings were to be allocated based on a formula that incorporated the proportion of the class H stock outstanding (rather than held by GM). Dividends on class H stock were to be determined by the directors of General Motors. Owners of the class H shares had no claim on the assets of Hughes. Rather, they had rights in the assets of General Motors as common stockholders of GM, not Hughes. At the time of the exchange the company stated that GM directors had no plans to pay dividends on the class H shares in the foreseeable future. It also warned that under certain circumstances the class H shares were subject to being recapitalized into shares of the $1 2/3 par value common stock. In other words, GM shareholders who exchanged for the class H stock might be forced to convert back to the same stock they had given up in the initial exchange. General Motors later put its Hughes subsidiary up for sale.

Tracking stock.

Some corporations issue tracking stock, a type of common stock whose value is linked to the performance of a particular division or business within a larger corporation rather than to the corporation as a whole.

Tracking stock separates the finances of the division from those of the parent company, so that if the division falters or takes time to become profitable, the value of the traditional common stock won't be affected.

If you own tracking stock, you actually are invested in the parent company, since it continues to own the division that's being tracked, though typically you have no shareholder's voting rights in the corporation.

References in periodicals archive ?
The QVC Group tracking stock allows investors to more closely track QVC's strong performance, including its leadership in mobile ecommerce and its visionary innovations that provide customers with a seamless, integrated shopping experience across all digital platforms.
Stockholders approved the Tracking Stock Proposal, with 58 percent of outstanding shares voting For; the Reclassification Proposal, with 58 percent of outstanding shares voting For; the Optional Conversion Proposal, with 56 percent of outstanding shares voting For; and the Group Disposition Proposal, with 56 percent of outstanding shares voting For.
Diversified companies that announce the issuance of tracking stock to existing shareholders also seem to be likely candidates for spin-offs.
Tracking stock constitutes a second class of common stock that tracks the operations of a specified unit within the company.
If your company has decided to separate a subsidiary, you'll need to choose which method of going public is best for your firm: issuing tracking stock, doing an equity carve-out, or spinning off the unit to existing shareholders.
said it was not the ideal time for Sony to list SCN as its tracking stock, a kind of stock that tracks the performance of a particular division or a subsidiary.
That's because a board-approved plan proposed allowing a number of company insiders and outside investors to cash in their shares of the tracking stock at a value far above the value it had 18 months ago, when the company started selling shares in private transactions.
If approved, it will be the first time in Japan for a company to issue tracking stock, a type of share that tracks the performance of a particular division or a subsidiary.
With so many companies merging and redefining themselves, it may be hard to value all of its divisions, so assigning a specific tracking stock can make for more of a pure play," he says.
AT&T's board has not given final approval to the tracking stock, but the company's management wants to announce plans for the spinoff and the new wireless initiative at a meeting with financial analysts on Dec.
Microsoft president Steve Ballmer told analysts yesterday that Microsoft "had no plans at this time" to introduce a separate tracking stock for its internet businesses.
com/research/pp9ljd/business_separatio) has announced the addition of the "Business Separation Transactions: Spin-Offs, Subsidiary IPOs and Tracking Stock.