What Is a Tracking Stock?
Let me explain what a tracking stock is: it's a special type of equity that a parent company issues to track the financial performance of one specific segment or division within its operations. This stock trades separately on the open market, distinct from the parent company's main stock.
As someone diving into this topic, you should know that tracking stocks let big companies highlight the performance of a faster-growing part of their business. This gives you, as an investor, a way to invest directly in that particular area, like the mobile arm of a huge telecom company, without betting on the whole enterprise.
Key Takeaways on Tracking Stocks
Here's what you need to grasp right away: a tracking stock is essentially a tailored equity security from a parent company meant to follow a certain division. It trades independently in the market, separate from the parent's stock. Its value rises or falls based mostly on how that division performs, not the company overall.
Companies use these to raise money and let investors zero in on one division. But remember, they come with the usual stock risks and often no voting rights for shareholders.
Understanding Tracking Stocks
When a company issues a tracking stock, it separates the revenues and expenses of that division from its main financial statements. The stock's long-term value depends on the division's finances, not the parent's. So, if the division thrives, the stock can go up even if the parent is struggling—and the opposite is true too.
You might see large firms do this to split off a segment that doesn't mesh with their core business, like a manufacturing giant with a small software unit. Or they isolate a high-growth area from a slower parent. Either way, the parent keeps control of operations.
These stocks get registered like regular common stocks under SEC rules, with similar issuance and reporting. Companies just add a separate section in their reports for the tracking stock and its division's finances. Keep in mind, they were big in the late '90s tech boom, but some still use them today.
Tracking Stocks Benefits and Risks for Investors
From an investor's standpoint, tracking stocks let you put money into just one part of a big conglomerate. These huge companies often have limited upside because of their diverse divisions, but tracking stocks give you access to the promising bits.
You can match investments to your risk level by picking segments that suit you. That said, watch out if the parent is shaky—tracking stocks have risks. You usually get little or no voting rights, and if the parent goes bankrupt, creditors could claim the division's assets, even if it's performing well.
Tracking Stocks Benefits and Risks for Companies
For companies, issuing these stocks brings in capital to pay debts, fund projects, or boost the division itself. You can also measure investor interest in different parts of your business by watching how each tracking stock performs—like separating wireless from landline in a telecom firm.
It avoids the hassle of spinning off a full separate entity, which would need its own board and management. On the downside, by carving out the best parts, the parent might suffer if it underperforms, since the strong division can't prop it up.
Pros and Cons of Tracking Stocks
- Pros: They give you access to a company's top divisions; performance depends only on that segment, not the whole parent; companies get new capital for debt or growth.
- Cons: You could lose if the division flops, even if the parent succeeds; limited or no voting rights; parent bankruptcy might let creditors seize the division's assets despite its health.
Example of a Tracking Stock
Take the Walt Disney Company in 1999: they issued a tracking stock for their internet division, Go.com, which included sites like ESPN.com, ABCNews.com, Disney Online, and Disney's Daily Blast. It traded as 'GO.'
But by January 2001, with the tech bubble bursting, Disney shut down Go.com, laid off hundreds, and retired the stock for good. This shows how tied these stocks are to their division's fate.
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