Times online; and Staples. com. Others soon wound down, including at Disney and DLJ( then owned by CSFB). While the market for tech recovered, the appetite for trackers remained dim. Although a few trackers launched in 2001 and 2002, none debuted during 2003 or 2004.
Skeptics included luminaires from the value investing world, such as Columbia Business School professor Bruce Greenwald and Wall Street Journal veteran Roger Lowenstein. They challenged many companies’ trackers as merely“ putting lipstick on a pig” or“ rearranging deck chairs on the Titanic.” Devotees of efficient market theory would contend that businesses are not incorrectly valued simply due to ownership structures.
During the bubble, many companies used trackers less to solve a knotty business problem— which could as easily be resolved by separate audited financials— than to follow or foment frothy market values. Many issuers lacked the compelling rationale that makes trackers suitable— such as operational synergies, interdependence, tax efficiency or acquisition opportunities. It was not enough to repeat versions of the US West story— which had in any event faltered, as did many others.
But despite the broad retreat from trackers, Malone saw them as an ideal solution for numerous challenges he faced managing Liberty Media, the company he has run since it was spun off from AT & T in 2002. Liberty was a complex group of diverse media assets needing simplification. Malone began by spinning off two businesses— a collection of international media assets and a 50 % stake in Discovery Communications. Still, Liberty Media perceived continued stock market undervaluation— by as much as 70 %.
So, in 2005 it created trackers, Liberty Interactive( LINTA) and Liberty Capital( LCAPA). LINTA was anchored by Liberty’ s 98 % interest in QVC, the television shopping channel and strong cash generator, and included the company’ s 22 % interest in Expedia, the online travel agency, and a 20 % stake in IAC, owner
Michael Armstrong( left), chairman and CEO of AT & T, and John Malone( right), chairman and CEO of Tele-Communications Inc., at a press conference announcing the merger of their companies, June 24, 1998.
of such companies as Ask Jeeves and Ticketmaster.
LCAPA would house all other assets, including, as the prospectus explained,“ video programming and communications technology and services involving cable, satellite, the Internet and other distribution media as they evolve”— in other words, anything telecom related. These assets included a variety of businesses and securities, such as the wholly-owned Starz and On Command; the partly-owned FUN; and public equity in Motorola, News Corp., Sprint and Time Warner— the latter accompanied by a variety of complex hedging instruments.
Liberty thus created two sets of assets of appeal to different groups of investors. Those who favored predictable cash flows from QVC and other straightforward stalwarts would be more attracted to LINTA; those wanting to bet on Malone’ s record of buying and selling a variety of diverse media assets and financial hedging transactions could gravitate towards LCAPA. The tracking stock format got investors to value the securities, providing insight to Liberty management, who obviously had the best knowledge of underlying asset value, but would benefit from investor signals in pinpointing more effective share buyback programs.
The tracking structure also created a currency for future acquisitions, an especially appealing feature for an acquisitive company like Liberty Media. This proved valuable by 2008 in the depths of the financial crisis, when LCAPA acquired satellite radio operator SiriusXM. With
HENNY RAY ABRAMS / Stringer a total return exceeding 38 times its initial investment( to date), this is among the most successful investments of the century, outdoing even those famously executed during the crisis by Warren Buffett. Other benefits of trackers also appeared, including tailored executive compensation, all debt remaining at the parent level minimizing associated costs and the capacity to recombine or spin-off the segments as circumstances warranted.
Critics would say that if parent stock is undervalued, a board can intensify buyback programs until corrected, and if a company is too complex, it should be simplified. On the other hand, Liberty had tried both buybacks and spinoffs, but undervaluation persisted. Costs of the tracking structure include internal managerial resources to design and implement it, along with external costs of educating analysts and investors on the rationales. But these costs are not great and, if the program fails, it can readily be unwound, also at modest incremental cost.
The issue came down to a venerable debate, whether trackers are mere financial engineering— in the purely negative sense of doing nothing to increase underlying fundamental value— or a financial achievement that increases value by deftly combining assets to cater to differing investor appetites for discrete segments. Given the dot. com experience, the verdict for almost all companies was in, but for Malone and Liberty Media, the jury was out.
After all, the same critical logic would denounce spin-offs, yet history proves their value— and, for that matter, the dot. com era aside, history had proven the value of trackers, as the McKinsey study showed. Today, history appears to be on the side of trackers: in 2008, the Wall Street Journal declared them“ relics” on the“ verge of extinction.” In 2016, tax lawyers from Fried Frank— where Ginsburg once worked— proclaimed, with apologies to Mark Twain, that reports of the death of trackers have been“ greatly exaggerated.” A new wave of trackers is emerging capable of offering compelling rationales.
30 FINANCIAL HISTORY | Fall 2017 | www. MoAF. org