Times online ; and Staples . com . Others soon wound down , including at Disney and DLJ ( then owned by CSFB ). While the market for tech recovered , the appetite for trackers remained dim . Although a few trackers launched in 2001 and 2002 , none debuted during 2003 or 2004 .
Skeptics included luminaires from the value investing world , such as Columbia Business School professor Bruce Greenwald and Wall Street Journal veteran Roger Lowenstein . They challenged many companies ’ trackers as merely “ putting lipstick on a pig ” or “ rearranging deck chairs on the Titanic .” Devotees of efficient market theory would contend that businesses are not incorrectly valued simply due to ownership structures .
During the bubble , many companies used trackers less to solve a knotty business problem — which could as easily be resolved by separate audited financials — than to follow or foment frothy market values . Many issuers lacked the compelling rationale that makes trackers suitable — such as operational synergies , interdependence , tax efficiency or acquisition opportunities . It was not enough to repeat versions of the US West story — which had in any event faltered , as did many others .
But despite the broad retreat from trackers , Malone saw them as an ideal solution for numerous challenges he faced managing Liberty Media , the company he has run since it was spun off from AT & T in 2002 . Liberty was a complex group of diverse media assets needing simplification . Malone began by spinning off two businesses — a collection of international media assets and a 50 % stake in Discovery Communications . Still , Liberty Media perceived continued stock market undervaluation — by as much as 70 %.
So , in 2005 it created trackers , Liberty Interactive ( LINTA ) and Liberty Capital ( LCAPA ). LINTA was anchored by Liberty ’ s 98 % interest in QVC , the television shopping channel and strong cash generator , and included the company ’ s 22 % interest in Expedia , the online travel agency , and a 20 % stake in IAC , owner
Michael Armstrong ( left ), chairman and CEO of AT & T , and John Malone ( right ), chairman and CEO of Tele-Communications Inc ., at a press conference announcing the merger of their companies , June 24 , 1998 .
of such companies as Ask Jeeves and Ticketmaster .
LCAPA would house all other assets , including , as the prospectus explained , “ video programming and communications technology and services involving cable , satellite , the Internet and other distribution media as they evolve ” — in other words , anything telecom related . These assets included a variety of businesses and securities , such as the wholly-owned Starz and On Command ; the partly-owned FUN ; and public equity in Motorola , News Corp ., Sprint and Time Warner — the latter accompanied by a variety of complex hedging instruments .
Liberty thus created two sets of assets of appeal to different groups of investors . Those who favored predictable cash flows from QVC and other straightforward stalwarts would be more attracted to LINTA ; those wanting to bet on Malone ’ s record of buying and selling a variety of diverse media assets and financial hedging transactions could gravitate towards LCAPA . The tracking stock format got investors to value the securities , providing insight to Liberty management , who obviously had the best knowledge of underlying asset value , but would benefit from investor signals in pinpointing more effective share buyback programs .
The tracking structure also created a currency for future acquisitions , an especially appealing feature for an acquisitive company like Liberty Media . This proved valuable by 2008 in the depths of the financial crisis , when LCAPA acquired satellite radio operator SiriusXM . With
HENNY RAY ABRAMS / Stringer a total return exceeding 38 times its initial investment ( to date ), this is among the most successful investments of the century , outdoing even those famously executed during the crisis by Warren Buffett . Other benefits of trackers also appeared , including tailored executive compensation , all debt remaining at the parent level minimizing associated costs and the capacity to recombine or spin-off the segments as circumstances warranted .
Critics would say that if parent stock is undervalued , a board can intensify buyback programs until corrected , and if a company is too complex , it should be simplified . On the other hand , Liberty had tried both buybacks and spinoffs , but undervaluation persisted . Costs of the tracking structure include internal managerial resources to design and implement it , along with external costs of educating analysts and investors on the rationales . But these costs are not great and , if the program fails , it can readily be unwound , also at modest incremental cost .
The issue came down to a venerable debate , whether trackers are mere financial engineering — in the purely negative sense of doing nothing to increase underlying fundamental value — or a financial achievement that increases value by deftly combining assets to cater to differing investor appetites for discrete segments . Given the dot . com experience , the verdict for almost all companies was in , but for Malone and Liberty Media , the jury was out .
After all , the same critical logic would denounce spin-offs , yet history proves their value — and , for that matter , the dot . com era aside , history had proven the value of trackers , as the McKinsey study showed . Today , history appears to be on the side of trackers : in 2008 , the Wall Street Journal declared them “ relics ” on the “ verge of extinction .” In 2016 , tax lawyers from Fried Frank — where Ginsburg once worked — proclaimed , with apologies to Mark Twain , that reports of the death of trackers have been “ greatly exaggerated .” A new wave of trackers is emerging capable of offering compelling rationales .
30 FINANCIAL HISTORY | Fall 2017 | www . MoAF . org