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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