What are the advantages and disadvantages of tracking stock?

Advantages of Tracking Stock

A key advantage of tracking stock is that it offers divisional managers a degree of decision-making authority that might otherwise be unattainable, given top management’s reluctance to dilute it’s control over the division’s assets. The practical effect should be to enhance job satisfaction for divisional managers, thus reducing retention risk and also increasing the company’s responsiveness to changing market conditions. Also, investors have more direct access to the specific businesses of the parent, which can be highly useful in the case of a diversified company. Another popular reason for growing popularity of trackers is that trackers allows mainstream companies to exploit the dual stock market pricing between conventional and high-tech or internet businesses. By creating tracked business units, conventional businesses too can benefit from pricing frenzy.

Disadvantages of Tracking Stock

For investors, tracking stock can be of a mixed bag. Like regular stocks, tracking stockholders are entitled to dividend paid out by the subsidiaries issuing the tracking stock. Yet the holders of tracking stocks do not have ownership in the company, instead, at – times tracking stock shareholders vote on issues affecting the corporate parent, not the subsidiary whose stocks they own. Another downside is the fact that the board of directors of the tracking stock subsidiary is often put in place by the parent company and is not elected by tracking stock shareholders, which would cause conflict of interests.

The tracking stock are highly skeptical also. Shareholders have limited voting rights, if any, and they cannot elect their own boards. Moreover, if the parent company falls on hard times, conflict could develop between the shareholders of a tracked division, especially if it continues to do well, and the shareholders of the parent company. The potential for such conflict could affect the performance of the tracking Stock.

Another important drawback with tracking stock is that it can dramatically increase the potential for conflict and litigation over accounting policy. It is because the owners of tracking stock have rights only over dividend, and dividend payouts are driven by the recognition of divisional profits, the arguments over profit recognition are almost sure to arise whenever tracking stock investors are disappointed in their returns. They will surely be tempted to accuse corporate management of adopting policies that deliberately understand their profits.

 

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What is Tracking Stock?