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Back on track?

20 October 2015 By Reynolds Holding

Dell is trying to refresh the user experience of tracking stock. The bursting of the dot-com bubble in 2000 exposed the problems with synthetic shares pegged to certain assets of a company. The PC maker has patched some flaws with the shadow VMware stock it’s proposing to issue in its $60 billion-plus deal for storage maker EMC. But there are still bugs.

Tracking stock allows a company to offer a notional stake in one of its units without relinquishing control. The shares in the Dell-EMC deal would be linked through contractual terms to actual stock of VMware. EMC owns about 80 percent of the software company, and the new tracking stock would account for just more than a 50 percent interest.

General Motors was the first company to issue a tracking stock, pegging it to the performance of Electronic Data Systems, acquired from Ross Perot in 1984. Sprint, Genzyme and dozens of others followed suit, often to goose the worth of supposedly underappreciated technology divisions. Investors gained separate disclosure of the relevant assets’ financial performance, and could value them independently.

When the tech crash squelched operations like Walt Disney’s internet portal Go.com, however, tracking stocks all but disappeared. One holdover is media mogul John Malone, whose companies still use such securities.

The inadequacies, though, make a broad revival improbable. Tracking stocks generally carry no voting rights or claims to dividends or to assets in bankruptcy, rendering them difficult to value. It’s unclear, too, whether an issuer’s board owes their owners any duties of loyalty, leaving holders vulnerable to potential conflicts with other shareholders.

Dell’s tracking-stock idea lacks detail as yet, but there’s one big difference: the planned VMware trackers relate directly to actual traded shares. That at least provides a market valuation benchmark. And the tracking-stock owners’ interests will coincide with regular VMware shareholders’ concerns, providing some governance comfort.

Yet the relationship would still be filtered through contractual commitments provided by Dell-EMC, not with VMware directly. That means some of the usual tracking-stock problems remain. The likely trading discount to actual VMware stock might also eventually become a curse.

Investors are still sifting through these risks. Their reaction could determine whether Dell’s tracking stock 2.0 is user-friendly enough to escape the fate of the Commodore 64.

 

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