NEW YORK -- WorldCom ruffled Wall Street this past week when it announced it was restructuring and adding a tracking stock for its ailing long distance business.
The telecommunications company touted the move as an opportunity "to create greater shareholder value" -- or raise its stock price. But the news, which came less than a week after a similar announcement from AT&T, got a mixed reaction and WorldCom lost 18.4 percent during the week.
A tracking stock is a type of common stock whose earnings are directly tied to a particular subsidiary or unit of a company. Unlike regular shareholders of the parent company, tracking stock owners lack direct voting rights and any claim to the unit's assets. Instead, ownership is limited to a share of the profits.
Supporters of tracking stocks say allow investors to focus on particular aspects of a company's business. They also give corporations cash to fund their growth.
"As there's more consolidation, tracking stocks will help companies differentiate their businesses," said Tom Eagan, a Paine Webber analyst.
But detractors argue that shareholders end up paying an inflated value for access to a business that's ultimately controlled by a company they have no say in, unless they also own stock in the parent.
"It's an investment bank trick," said Hugh Johnson, chief investment officer at First Albany Corp. "You don't have the rights that a shareholder would normally have. And you're paying a premium to own something that is owned and controlled by someone else."
Tracking stocks date back to the 1980s, but their popularity has increased in recent years.
At least half a dozen major corporations now use or have talked about using tracking stocks, including General Motors, J.C. Penney, Cablevision, DuPont and Sprint.
AT&T debuted a tracking stock in April to follows its wireless communications business. Late last month, the telecom company said it would add another.
What makes the new tracking stocks from WorldCom and AT&T different is that they will focus on operations that have been losing money: each company's consumer long-distance unit.
Most of the other tracking stocks on the market are designed to showcase high-growth areas and highlight the diversity of a company's operations.
The granddaddy of the group is automaker General Motors, which has used a tracking stock for its Hughes Electronics subsidiary since the mid 1980s. The strategy has helped Hughes, which provides television via satellite, attract investment and attention, while GM maintains ownership, control and profits from the company.
"GM is our parent company but we're in an entirely different market than they are," said Hughes spokesman Richard Dore. "A tracking stock lets investors get more immediate returns on the growth potential of Hughes. You invest in GM for dividends and for the long-term."
What shareholders care about most, though, is performance. But it's not clear whether tracking stocks deliver.
A University of Iowa study of 28 tracking stocks issued before the end of 1998 reported less than impressive results. The study found, on average, tracking stocks earned 11.7 percent a year, compared to 21 percent for the overall market. With Sprint PCS excluded, the tracking stock's annual average fell to 5.7 percent.
As part of a general slump in the telecommunications industry, AT&T Wireless is trading 37 percent off its high since its debut last spring. But AT&T's common stock is faring even worse: down 62 percent from its 52-week high.
Experts say investors need to make sure they understand what they're buying, and to realize that the purchase of a tracking stop isn't the same as buying another company's stock or the stock of a company that's been spun off.
"These can be good for investors, but you have to educate yourself," said Brian Belski, a fundamental market strategist for U.S. Bancorp Piper Jaffray.
This past week, the Dow Jones industrial average closed at 10,817.95, up 227.33 or 2.1 percent following Friday's 62.56-point drop.
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