Although the story began with Ginsburg and Perot, it stars a third figure, who has issued more trackers than anyone, a quarter of the total ever created, representing an even larger share by value: John Malone, the maverick billionaire known as the“ cable cowboy” for pioneering consolidation of that industry and as a financial engineer.
Malone, a Ph. D. in operations from Johns Hopkins University, fostered the rise of tracking stocks, employed them rigorously despite their fall from favor and today leads their revival. He and his shareholders have benefitted so greatly that they may wish to endow another chair honoring Ginsburg. Yet trackers remain misunderstood, as a recent proxy contest involving them at their birthplace, GM, attests.
Ginsburg’ s Model
When corporations issue stock, stock holders enjoy many rights against that issuer; boards control the whole and owe associated duties to all stockholders; and governments levy associated taxes. Ginsburg devised a tool to splice rights to different shareholder groups, without relinquishing board prerogatives or repudiating duties, and deferring tax consequences. In effect, the Ginsburg tracking stock structure amounts to“ internal spinoff”— separation without divestiture.
To secure this treatment, the terms of tracking stock put parental control in its board, provide mechanisms to track the economic performance of the targeted business and set policies for dealings between parental units to be at arm’ s length. Boards often adopt dividend policies based on cash flows of targeted businesses, retain power to convert tracking stock into the parent’ s common stock( an“ unwind” feature) and pledge to redeem the stock upon the sale of the tracked business’ s assets. Otherwise, tracking stock terms are the same as the parent’ s ordinary common stock, on matters such as voting rights and rights upon parent liquidation, although some variation is possible.
Exact advantages of tracking stock structures vary depending on the specific features of the various businesses and how they interact. Benefits may include offsetting tax benefits when one business generates substantial taxable profits while another incurs substantial losses; combined balance sheet strength equating to lower borrowing costs; immunization from antitrust laws that might prohibit two independent businesses from coordination that is perfectly legal among business units of the same family; and adding incentives for managers to enhance the performance of businesses they run by compensating them in their own tracking stock.
Trackers’ Rise
The Ginsburg model, tailor-made for GM’ s acquisitions, was soon adapted to other settings. In 1991 – 92, US Steel Corporation enjoyed synergies through common control of such diverse subsidiaries as Delhi Group and Marathon Oil, which shared gas-processing plants and enjoyed lower borrowing costs together than if independent. But the businesses had distinct economics so that a tracking stock would keep the advantages of common control and increase visibility into the tracked business with gains for stockholders and managers alike. The solution worked for a decade until USX spun Marathon Oil off.
In 1995, after the government’ s antitrust break-up of AT & T, US West was a regional telephone company which also owned cable and cellular assets. Investors attracted to the stability of the telephone utility might recoil at the volatility of media assets; those seeking rapid growth would have opposite tastes. Trackers satisfied the demand of each while housing all operations under common control, harvesting related synergies. To further meet investor tastes, the utility side would pay regular dividends as the media side would reinvest earnings. And the arrangement could be unwound as circumstances changed. In fact, in 1998, after synergies proved elusive, US West spun off the media business.
In the mid-1990s, Malone used trackers not only as acquisition currency as in the original GM deals, but also to segment the economics of diverse media assets he had been acquiring through TeleCommuncations Inc.( TCI). In addition to other advantages ranging from antitrust to tax, Malone identified synergies among the businesses as well as interdependence— cable assets along with programming, for example, better combined than separate, but sporting vastly different economic attributes. With tracking stocks, that can translate into higher price-earnings multiples that strengthen their value as an acquisition currency compared to the parent’ s straight common stock.
The TCI transactions were distinct in both complexity and boldness, which drew critics. Law professor Jeffrey Haas referenced conflicts between siblings that all parent boards using trackers face. TCI’ s prospectus said as much, then simply avowed confidence in its directors’ ability to discharge their duties. This amounted to an“ implicit message of‘ trust us’,” Haas complained, urging such boards to establish structural cures, such as independent committees. But no governance devices can resolve such problems, and one truth about trackers is that, to work, the parent’ s board must be trustworthy.
Trackers, after all, are not for every company, as a 1999 McKinsey research report highlighted. The researchers documented several advantages of trackers, including expanded analyst coverage( observing a 25 % increase) and drawing new investors( finding only 27 % ownership overlap of the parent and the tracked subsidiary). They found a 12 % increase in return on invested capital, which they attributed to new parent ability to“ offer manager incentives tied to the market performance of the divisions they run” and to“ push management accountability deeper into the organization.” Above all, the McKinsey authors stressed that successful trackers require a compelling rationale.
Stumble and Fall
As investor Bill Ruane once lamented,“ On Wall Street, the process goes from innovation to imitation to irrationality.” The same held for trackers, as they proliferated in the late 1990s technology sector amid irrational exuberance fueling a bubble. A common theme featured a traditional company offering trackers in an Internet subsidiary: bookseller Barnes & Noble for e-tailing operations; The Walt Disney Company with Go. com; brokerage firm Donaldson, Lufkin & Jenrette for its online trading business, DLJdirect; and publisher Ziff-Davis for its online operations, ZD. net.
Nearing a peak, in mid-2000 about 30 listed trackers traded— half issued during the bubble— and several then pending were soon aborted, including for DuPont Co.’ s life sciences business; The New York
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