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Tracking Stock



Definition

A tracking stock is a type of common stock that “tracks” or depends on the financial performance of a specific business unit or division of a larger company, rather than the operations of the company as a whole. This allows the different divisions of a company to be individually assessed by investors. However, holders of the tracking stock may not have the same voting rights as the holders of the common stock of the company.

Phonetic

The phonetic pronunciation of “Tracking Stock” is “ˈtrækɪŋ stɑːk”.

Key Takeaways

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  1. Tracking Stock represents a specific division of a company, enabling investors to invest in that division without owning the entire company. This allows both the company and investors to track the performance of that particular division separately from the rest of the company.
  2. Issuing Tracking Stock can benefit a company when specific divisions have high growth potential. This can attract investors who are particularly interested in the activity of that subsidiary, while not affecting the control of the main company, as owners of the tracking stocks usually do not have voting rights.
  3. However, Tracking Stock carries potential risks as well. It can create shareholder conflicts of interest and might complicate the company’s structure. Furthermore, these stocks often don’t grant ownership of the company’s assets, which means that if the company goes bankrupt, tracking stock shareholders are less likely to receive any compensation.

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Importance

Tracking stock is an important concept in business and finance because it allows a company to highlight the value of a specific division within its larger portfolio. This can help to draw attention to high-performing sections of the business, potentially increasing investor interest and overall market value. Additionally, tracking stock can be used as a strategic tool for companies looking to raise capital specifically for a particular division without selling off assets. It also offers an opportunity for the shareholders to invest in a targeted area of a corporation’s operations, making it an attractive option for investors looking for specialized investments. Therefore, understanding tracking stock can be beneficial for both businesses and investors.

Explanation

Tracking stock represents a specific business segment or unit of a larger, publicly-traded company which allows investors to value this segment separately from the rest of the business. This type of stock traces the economic performance of the designated business division rather than the whole corporation. Its purpose is to delineate the financial progress of a particular division which may offer a unique growth or risk profile compared to the company’s general operation. For instance, a tech company might issue tracking stock for its pioneering AI division, allowing investors to invest specifically in the fortunes of that division rather than in the company as a whole. The concept behind the use of tracking stock is to draw investor attention and raise capital for that particular part of the company without having to spin it off into a separate entity. For investors, this provides an opportunity to capitalize on the growth and performance of a specific segment of a company.

Examples

1. General Motors: In the late 1980s, General Motors issued tracking stock for its Electronic Data Systems (EDS) and Hughes Electronics units. By doing so, it was able to separate the performance of these subsidiaries from its automobile business, giving investors an opportunity to invest specifically in these units if they believed in their potential growth.2. Dell: In 2016, Dell issued tracking stocks (DVMT) to help fund its acquisition of data storage company EMC. The idea was to track and mirror the economic performance of Dell’s 81% stake in VMware, a software subsidiary of EMC. This allowed Dell more financial flexibility while also enabling EMC to continue pursuing VMware’s high growth potential.3. Liberty Media: Liberty Media has created multiple tracking stocks to distinguish between its different ventures. For example, it issued separate tracking stocks for its stakes in SiriusXM (LSXMA, LSXMB, LSXMK) and the Atlanta Braves (BATRA, BATRB, BATRK). This strategy allows investors to invest specifically in the businesses they are most interested in, rather than investing in all of Liberty Media’s holdings collectively.

Frequently Asked Questions(FAQ)

What is Tracking Stock?

Tracking stock is a type of common stock that tracks or depends on the financial performance of a specific business unit or division of a company rather than the operations of a company as a whole.

How does tracking stock work?

Companies issue tracking stocks to separate the financial performance of a particular division from the rest of the company. This allows investors to invest directly into the division they believe will perform better.

What are some examples of companies that have issued tracking stocks?

Prominent examples of companies that have issued tracking stocks include General Motors, Disney, AT&T and Sprint Corporation.

How is tracking stock different from regular stocks?

Unlike regular stocks, tracking stocks do not give the holder a claim to the company’s assets, only to the earnings of a particular division. Additionally, tracking stockholders typically have limited voting rights or none at all.

Why would a company want to issue tracking stocks?

A company may choose to issue tracking stocks to highlight the value of a division which is performing well but whose value might be hidden within the larger corporation. It can also be used as an alternative to spinning off a division or a merchandise in order to raise capital.

What are the risks associated with tracking stocks?

The risks associated with tracking stocks are similar to those of regular stocks. However, tracking stockholders face an additional risk because they are at the mercy of the parent company’s decisions. Also, they don’t have any claim over the company’s assets in the event the company goes bankrupt.

Can a tracking stock be converted into a regular stock?

Converting a tracking stock into regular stock is not typically possible due to their structural differences. However, the parent company can decide to buy back tracking stocks or merge them with regular stocks.

Where can I buy tracking stocks?

Tracking stocks are bought and sold on the stock market just like any other publicly-traded stocks. They are listed separately from the common stock of the company and can be purchased through a brokerage account.

Related Finance Terms

  • Spin-Off
  • Parent Company
  • Subsidiary Company
  • Equity Valuation
  • Earnings Per Share

Sources for More Information


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