Tracking Stock
1. Common stock issued by a parent company that tracks the performance of a particular division without having claim on the assets of the division or the parent company. Also known as "designer stock".
2. A type of security specifically designed to mirror the performance of a larger index.
Investopedia Commentary
1. 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. Oftentimes, this is done to separate a subsidiary's high-growth division from a larger parent company that is presenting losses. The parent company and its shareholders, however, still control the operations of the subsidiary.
2. The most popular tracking stock is the QQQQ, which is an exchange-traded fund that mirrors the returns of the Nasdaq 100 index. Another type of tracking stock is Standard & Poor's depository receipts (SPDRs), which mirror the returns of the S&P 500 index.
Related Links
Index Investing Tutorial
IPO Basics Tutorial
See also: Carve-Out, Consolidated Financial Statements, Exchange-Traded Fund - ETF, Initial Public Offering - IPO, Parent Company, QQQQ, Spiders - SPDRs, Spinoff, Stock, Subsidiary
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tracking stock
- A common stock that provides holders with a financial interest in a particular segment of a company's business. Essentially, a tracking stock is a proxy for the value of the subsidiary if it were independent and publicly traded. Tracking stocks are generally issued by corporations that feel their firms are not being fully valued by investors.
Case Study In April 2000 General Motors Corporation offered owners of its $1 2/3 par value common stock an opportunity to exchange each of their shares for 1.065 shares of the firm's class H common stock. The company stated it would accept tenders of up to 86,396,977 shares, or approximately 14% of its outstanding common stock. Class H common was a tracking stock designed to provide holders with financial returns based on the financial performance of GM subsidiary Hughes, which General Motors would continue to control. Dividends to class H shareholders depended on the portion of Hughes's earnings allocated to the class H stock. Hughes's earnings were to be allocated based on a formula that incorporated the proportion of the class H stock outstanding (rather than held by GM). Dividends on class H stock were to be determined by the directors of General Motors. Owners of the class H shares had no claim on the assets of Hughes. Rather, they had rights in the assets of General Motors as common stockholders of GM, not Hughes. At the time of the exchange the company stated that GM directors had no plans to pay dividends on the class H shares in the foreseeable future. It also warned that under certain circumstances the class H shares were subject to being recapitalized into shares of the $1 2/3 par value common stock. In other words, GM shareholders who exchanged for the class H stock might be forced to convert back to the same stock they had given up in the initial exchange. General Motors later put its Hughes subsidiary up for sale. |
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