Tracking Stocks Off Track Now; Do They Make Sense Long Term?

By DAVID LEWIS

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Tracking stocks, like the broader equities markets, have come down to earth, with several offerings delayed or killed by companies wary of the wobbly market.

But experts say it's only a matter of time before tracking stocks make a comeback, albeit with the increased scrutiny now being applied to conventional Internet and technology stocks.

Most recently, Dow Jones & Co. said it wouldn't issue a planned stock to track its online operations, while the New York Times postponed issuing an Internet tracking stock. Others, including AltaVista, Cendant, Excite@Home, MTVi and Yupi Internet, have cancelled similar issues over the past several months.

But other high-tech companies, including Computer Associates, Electronic Arts, Global Crossing and Staples.com, still see an opportunity to bring attention and add value to a dotcom or other division with a tracking stock.

Tracking stocks track the performance of a division or subsidiary. They don't represent an equity share in the company. They do represent--when they work as designed--a way to highlight a company's strengths by attracting attention from analysts and investors.

Trackers' stock options can also help companies attract and retain talent.

They can even help companies hold down their cost of capital by giving companies "bifurcated access" to capital markets. "You borrow as a consolidated entity, but when you go to the equity market, you go as either AT&T or AT&T broadband," said Barbara Byrne, a managing director with investment banking firm Lehman Bros.

Tracking stocks, Byrne said, works well for telecommunications or other companies "that need capital, a huge platform and a huge growth trajectory to build value and facilitate competitiveness."

One downside is their lack of a "takeover premium"--the extra amount investors might pay for a stock on the chance it will attract a wealthy buyer. There are also potential conflicts of interest within the parent company's board of directors, and the possibility that a parent company's problems will drag down the tracker.

"These can be very valuable things, like any other tool or instrument," said Ananth Madhavan, managing director of research for ITG Inc., a research and institutional trading house in New York. "But if they're misused, they can send the wrong signals. A lot of people think of them as trendy."

Twelve tracking stocks were launched last year, by far the largest annual number. Performance has been mixed.

PerkinElmer's tracking stock, Celera Genomic Group, which sequenced the human genome, has appreciated 773 percent between its May 1999 issue and mid-July 2000. General Electric's NBCi, which wrapped up NBC's online operations, is down 81 percent since its Nov. 30 introduction.

In general, 1999's Internet-related tracking stock issues didn't distinguish themselves.

So far this year, just one tracking stock has been issued, AT&T Wireless Group. The share price spiked shortly after its April issue at $35.50, then sank to the $26 range, where it remains. It's been reported that AT&T is considering separate tracking stocks for cable TV, consumer long-distance and other businesses. AT&T declined to comment.

Joseph Cornell, president of Spin-Off Advisors LLC, a consultancy in Chicago, said, "The window for tracking stocks definitely was in the spring, when anyone with two dogs could do an IPO. To me, the whole thing is just kind of smoke and mirrors."

Lehman's Byrne argues that well-positioned trackers have performed well. "It would be naive to think that AT&T, Sprint and Global Crossing didn't clearly think through what they were doing," she said.

Critics and advocates agree on two things: Tracking stocks will be back; and, love them or hate them, take them one at a time.

"Each one is different," said Nick Moore, a portfolio manager with Jurika & Voyles in Oakland, Calif. "The single most important thing is to look and see what you own, and ask yourself, 'Was this really done for a good reason?' "