Tracking Stock

Tracking Stock is a type of equity security that allows investors to buy shares in a specific division or subsidiary of a parent company, reflecting the performance of that particular segment rather than the overall company.

Definition and Purpose

Tracking stock is issued by a parent company and is designed to mimic the financial performance of a specific part of the business, often a division or subsidiary. This allows the parent company to attract investments in that particular segment without creating a separate legal entity.

Characteristics of Tracking Stock

• Link to Subsidiary Performance: The value of tracking stock is directly tied to the performance of the specific division it tracks.
• Limited Voting Rights: Shareholders of tracking stock typically have limited or no voting rights regarding the overall company, as they only hold interest in the specific segment.
• Dividend Payments: Dividends may be paid to tracking stock shareholders based on the performance of the tracked segment, though they may not be as consistent as those paid on common stock of the parent company.
• Marketability: Tracking stocks can improve market visibility and investor interest for specific business units, thereby enhancing capital-raising capabilities.

How Tracking Stock Works

When a parent company issues tracking stock, it allows investors to participate in the financial success of a particular segment without needing to purchase shares in the entire company. Here’s how it generally works:

1. The parent company determines the performance metrics for the division being tracked.
2. Tracking stock is offered to investors through public or private selling.
3. Performance data is regularly communicated, and dividends (if any) are paid based on segment earnings.

Examples of Tracking Stock

One notable example of tracking stock is Liberty Media, which has issued tracking stock for its various media and entertainment divisions. Investors can buy specific tracking stocks to gain exposure to particular business units without directly participating in each segment’s operations.

Tracking stocks can be a strategic tool for companies looking to highlight or capitalize on the potential of certain divisions while maintaining the structural integrity of the overall business. However, investors should exercise caution due to their unique characteristics and potential lack of influence on overall corporate decisions.