Insatiable demand for technology


February 13, 2000|By Bill Atkinson

HEAR that giant sucking sound coming from Wall Street? Blame it on H. Ross Perot.

The flamboyant Texas business- man and former presidential candidate helped develop the blueprint for Wall Street's latest fad -- the tracking stock.

Ever since Perot persuaded General Motors Corp. to issue Electronic Data Systems Corp. shares in 1984, companies have had a tracking stock road map. And now, they are using it.

Of the 27 tracking stocks that are trading, 11 have come to market since late 1998, according to a study by Legg Mason Inc., a Baltimore-based brokerage and asset management company.

And a boom is about to begin, experts say.

"You are going to see tons of them, with the caveat that technology valuations hold up at extreme levels and the government doesn't crack down on them," says Raj Sehgal of, a research firm that follows corporate divestitures and tracking stocks. "Practically every technology company that has some legitimate Internet or telecom- munications subsidiary that they see as undervalued is considering it."

Tracking stocks are an easy way to satisfy investors' demand for hot segments of the stock market.

They let companies unleash the "true potential" of their fastest-growing business units within the corporation. To do this, companies issue a new class of stock to existing shareholders, and sell shares to the public in an initial offering. Once the offering is complete, the business trades as if it were a separate company.

What most tracking stocks have in common is that they tap into investors' desire for technology.

Brokerage Donaldson, Lufkin & Jenrette Inc. launched tracking stock DLJdirect in May, as investors bid up the stock prices of online brokerage companies. In November, Walt Disney Co. created to track the performance of its Internet and software businesses. The same month, Sprint Corp. unleashed Sprint Corp. (PCS Group), which operates its nationwide wireless network.

There are more tracking stocks in the pipeline.

Staples Inc. plans to unveil a tracking stock, so does Excite@Home, SBC Communications Inc., Chase Manhattan Corp., and AT&T Corp.

Richard Cripps, chief investment strategist at Legg Mason, says AT&T is being pressured by investors to offer a tracking stock that unlocks the power of its giant cellular phone business.

It expects to issue 19 percent of the stock in an initial public offering this year, which could raise up to $10 billion.

"It is going to be huge," Cripps says. "There is a lot of pressure on management to enhance shareholder value. This is a quick and easy way of doing it."

Such transactions benefit companies by helping a slow growing parent raise capital, which in turn can use the money to make acquisitions or reinvest in the business. Companies can also tie stock options to the new shares and use them to retain employees.

If the tracking company loses money, the parent can slice its tax burden.

Investors can benefit, too, by buying a rapidly growing segment of a large company whose stock price might be lumbering along.

But neither Cripps nor Sehgal is convinced that tracking stocks are best for individual investors.

Investors don't own the assets of the tracking stock subsidiary, the parent company retains control.

In addition, there is a conflict of interest in the structure because the board of directors of the parent also represents the tracking company. If problems arise, the board's loyalty resides with the parent company, experts say.

"You have a board of directors that really isn't your advocate," says Cripps, who believes investors would be better off owning the parent's stock.

Tracking stocks have had mixed performance.

Shares of DLJdirect are down about 78 percent and trade in the $10 range, since hitting a $45.625 per share high in May. Shares of Disney's slipped more than 28 percent since reaching a high of $37.6875 in November.

Pittston Co. recently shuttered two tracking stocks after poor performance.

But shares of Sprint PCS trade in the $51 range, and have a one-year total return of more than 200 percent. Not to mention shares of Perot's EDS, which rose at a compound annual growth rate of 22.5 percent from October 1984 to June 1996.

To this day, investors speak highly of Perot's idea.

"It was a great thing to do," said Myrna Vance, vice president of investor relations at EDS, which is now an independent company. "The stock went up and people felt they benefited quite a bit."

Pub Date: 2/13/00

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