TRACKING STOCKS :

A Tracking stock is a type of common stock that “tracks” or depends on the financial performance of a specific
business unit or operating division of a company, rather than the operations of the company as a whole. As a
result, if the unit or division performs well, the value of the tracking stocks may increase, even if the company’s
performance as a whole is not up to mark or satisfactory. The opposite may also be true.

A tracking stock is a special type of stock issued by a publicly held company to track the value of one segment
of that company. By issuing a tracking stock, the different segments of the company can be valued differently by
investors. Tracking stocks are generally issued by a parent company in order to create a financial vehicle that tracks the performance of a particular division or subsidiary. When a parent company issues a tracking stock, all revenues and expenses of the applicable division are separated from the parent company’s financial statements and bound to the tracking stock. Often this is done to separate a high-growth division from large losses shown by the financial statements of the parent company. The parent company and its shareholders, however, still control operations of the subsidiary.

Tracking stock carries dividend rights tied to the performance of a targeted division without transferring ownership or control over divisional assets. In contrast to a spin-off or an equity carve-out, the parent retains full control, allowing it to enjoy any operating synergies, or economies of scale in administration or finance.Shareholders of tracking stocks have a financial interest only in that unit or division of the company.

Unlike the common stock of the company itself, a tracking stock usually has limited or no voting rights. In the event of a company’s liquidation, tracking stock shareholders typically do not have a legal claim on the company’s assets.

If a tracking stock pays dividends, the amounts paid depends on the performance of the business unit or division.
But not all tracking stocks pay dividends.

A company has many good reasons to issue a tracking stock for one of its subsidiaries (as opposed to spinning
it off to shareholders).

(i) First, the company keeps control over the subsidiary (although they don’t get all the profit), but all revenues and expenses of the division are separated from the parent company’s financial statements and attributed to tracking stock. This is often done to separate a high growth division with large losses from the financial statements of the parent company.

(ii) Second, they might be able to lower their costs of obtaining capital by getting a better credit rating.

(iii) Third, the businesses can share marketing, administrative support functions, etc.

(iv) Finally, if the tracking stock shoots up, the parent company can make acquisitions and pay in stock of
subsidiary instead of cash.

When a tracking stock is issued, the company can choose to sell it to the markets (i.e., via an initial public
offering) or to distribute new shares to existing shareholders. Either way, the newly tracked business segment
gets a longer lease, but can still run back to the parent company in tough times.