VideoFinance executives inclined to jump on the tracking-stock bandwagon should first consider recent events at The Pittston Co. In December, Pittston announced plans to abandon three tracking stocks in favor of a conventional single issue. This retrenchment supplies a cautionary tale about what can go wrong when tracking stocks falter.
In the newest wave, companies issuing tracking stocks, or planning to, include AT&T, SBC Communications, Microsoft, Excite@home, Staples, J.C. Penney, Office Max, Pearson, Cendant, Aetna, and Countrywide Credit Industries, the biggest U.S. nonbank mortgage lender.
More than 40 tracking issues are now trading, and the enthusiasm might soon spread to other countries: Japan's Keidanren, a federation of economic organizations at the heart of Japan Inc., began pressing the Tokyo government late in November to permit Japanese corporations to issue tracking stock.
At Pittston, however, enthusiasm has vanished. An old-line Appalachian coal company that diversified into services a generation ago, Pittston, based in Glen Allen, Virginia, set up tracking stocks in the mid-1990s to highlight its Brink's and Burlington Air Express operations. Pittston Brink's Group delivers money in armored vehicles and has a flourishing home-security business. Burlington, now called Pittston BAX Group, is a freight hauler and forwarder.
Pittston's third tracking stock, Pittston Minerals, is its old mining side. Of Pittston's $4 billion in revenues for the 12 months through last September, BAX accounted for 49.6 percent and Brink's for about 40.1 percent. The coal business, once Pittston's main operation, now barely exceeds 10 percent of revenues.
These tracking stocks added considerable market value until 1998. First BAX began to slide. Then Brink's, the most profitable of the three, turned down early last year. By last fall, Pittston saw its market capitalization halved, to barely $1 billion.
In December, Pittston chairman and chief executive officer Michael T. Dan told securities analysts that the tracking-stock structure wasn't working anymore. In conjunction with efforts to sell the coal mines, Dan decided to fold the tracking stocks back into a single corporate issue. Without the coal business, Dan reckons Pittston's service arms would have generated $400 million of cash flow on $3.6 billion in revenues in 1999.
"Pittston's tracking- stock structure was very successful in enhancing shareholder value when it was first introduced in 1993 and expanded in 1996," Dan told shareholders last December. "However, given our substantial legacy costs, as coal-market conditions have continued to weaken and the profitability of our coal business has deteriorated, the tracking- stock structure has not resulted in appropriate valuations of our three stocks."
Says Sandy Katzler, a Standard & Poor's Corp. analyst: "The coal liabilities had begun to cast a shadow over the other two businesses."
Rooting Interest
For issuers, a tracking stock provides a way to showcase an exciting, high-growth business unit that might otherwise go unnoticed amid the company's other operations. What investors may not realize, however, is that they don't own shares in the units directly (see "On The Right Track?") Shareholders receive financial statements for the tracking-stock units, but they actually own shares in the parent.
Some tracking shares, in fact, have no voting rights at all. "It's very hard to figure out exactly what your legal claims are," says Wayne Mikkelson, a University of Oregon professor who follows tracking stocks. Says Paul R. Schlesinger, a securities analyst at Donaldson, Lufkin & Jenrette Inc.: "Tracking stock gives you no voting interest [in the unit it represents] and only a very limited economic interest. Mainly, it gives you a rooting interest."
Unlike a spin-off, which turns a division or subsidiary into a stand-alone company with its own board of directors and management team, tracking-stock units remain entirely under the parent's thumb. That gives managers great latitude in assigning assets. The first duty of the board and management, however, is to the parent--which sets up possible conflicts of interest over allocating costs or capital investment.
"As soon as companies run into a cash-flow bind, managers are going to look internally for sources of cash at other units," says Mikkelson. "That's when you'll see shareholder lawsuits." One suit has already been brought--by GM shareholders claiming they were duped by GM's tracking stocks. A Delaware court ruled against them last summer on grounds that, as GM shareholders, they had voted for the tracking stocks in the first place.
Tracking-stock units share the same consolidated balance sheet with the parent's other businesses--that is, all are liable if one unit can't pay its debts. What doomed Pittston's tracking-stock structure was shareholders' realization that the company's two favored tracking stocks, for Brink's and BAX, shared in the huge liabilities of the coal business.
An absence of clear business strategies also worked against Pittston. "The tracking stock stopped working when the companies that backed the tracking stock stopped performing," says Alex Brand, an analyst at Scott & Stringfellow Inc., in Richmond, Virginia, who follows BAX. Asked for their assessment, neither Dan nor Pittston CFO Robert T. Ritter would agree to be interviewed for this article.
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