Capital Markets

Making Tracks

Tracking stocks may be all the rage, but they actually yield little additional shareholder value.
Kris FrieswickJune 1, 2000

AT&T’s massive issue of a tracking stock reinforces the notion that trackers have become the capital markets ploy du jour. Investors, many of them average AT&T employees, plunked down $10.6 billion for the stock, a subclass to the parent that is pegged to the wireless division’s assets.

But it’s likely that enthusiastic AT&T investors didn’t read the new research that says they yield little additional shareholder value and don’t outperform market indexes over the long haul.

Two University of Iowa professors found that for tracking stock issued prior to the end of 1998, annualized returns were 11.7 percent a year, whereas the market earned 21 percent annually. And half of the 11.7 percent return was driven by one tracking stock, Sprint PCS (Sprint’s wireless division), which increased by 505 percent.

Without Sprint PCS, the remaining trackers earned just 5.7 percent a year, the research showed. Some issues, like Donaldson, Lufkin & Jenrette Inc.’s DLJ Direct, have lost two- thirds of their value since being issued (see chart, below).

“Before our study, there wasn’t much scientific evidence to show that tracking stocks don’t perform well,” said Anand Vijh, professor of finance at the Tippie College of Business, University of Iowa. “In some cases, they do perform well. But it’s the latest fad. We don’t understand why these tracking stocks are issued as often as they are.”

But companies appear eager to spin off more tracking issues. The New York Times Co. shareholders were scheduled to vote on a tracking issue on its New York Times Digital division in late May. There are at least eight other tracking stock issues in the works for 2000, according to Spin-Off Equity Research, in Chicago.


TOP TRACKING STOCK PERFORMERS


Parent Tracking Stock

Date

Tracking Chg.*(%)

S&P Chg.*(%)
GM Hughes Electronics 11/4/85 603 621
CMS Energy CMS Gas Group 7/21/95 262 157
Sprint PCS Wireless 11/24/98 203 25
AT&T Liberty Media 3/10/99 68 11
Perkin- Elmer Celera Genomics
PE Bios Systems
5/6/99
5/6/99
555
178
7
7

*Between issue and 4/24/00.
Source: Spin-Off Equity Research

THOSE THAT HAVE FALLEN OFF TRACK

Parent

Tracking Stock

Date

Tracking Chg.*(%)

S&P Chg.*(%)

Fletcher Challenge Building 3/26/96 ­ 62 118
Circuit City Carmax 2/4/97 ­ 90 80
Ziff- Davis ZDNet 3/31/99 ­ 68 11
DLJ DLJ Direct 5/26/99 ­ 67 9
GE NBCi 11/30/99 ­ 76 2
Snyder Commun. Circle.com 10/29/99 ­ 69 4

*Between issue and 4/24/00.
Source: Spin-Off Equity Research