Revival
In 2013, Fantex, whose business consists
of separate branding contracts with pro-
fessional athletes, offered trackers tied to
the economic value of those contracts. In
2014, Fidelity National Financial Inc., a
title insurance company with an invest-
ment strategy focused on individual busi-
nesses, offered trackers tied to its core
business as well as those investees. In
2016, Dell used tracking stock as part of its
purchase of EMC Corp., tracking EMC’s
80%-owned subsidiary, VMWare, Inc., a
publicly-traded software company.
Researchers at Merrill Lynch in 2016
published a paper similar to the McKinsey
study two decades earlier, with updates. It
identified all the familiar benefits, as well
as the costs, and it stressed that trackers
are only advisable when a company can
offer a compelling rationale. It devoted
a full page to depicting nearly a dozen
Liberty Media trackers, and wrote: “The
tracking stocks and spin-offs issued by
Liberty from 2004–2015 have resulted in
an out-performance vs. the S&P 500 Index
of >200% for the Liberty investor.”
Liberty is distinct in at least two ways
that may explain some of its unusual
success with trackers. Malone is the con-
trolling shareholder, a status that dimin-
ishes shareholder criticism for adopting
a tracker, or for terminating one, seen as
ineffective. The problem of conflicts also
differs. True, Malone and other direc-
tors face challenges allocating assets and
opportunities among the parent’s tracking
stocks, and personal holdings may skew
judgments. Yet because the team has for
decades successfully led their dynamic
and financially innovative corporate behe-
moth, they enjoy a vast reservoir of share-
holder trust.
In 2017, the highest-profile non-Lib-
erty consideration of a tracking struc-
ture occurred, at the birthplace of them
all, GM. Finding GM’s stock persistently
undervalued, shareholder David Einhorn
proposed trackers, with a twist. Rather
than tying performance to subsidiaries,
such as US versus China or manual auto-
mobiles versus autonomous, this proposal
offered menus tied to relative investor
appetites for growth versus yield: one
entitled to quarterly dividends and the
other to capital appreciation based on
retained earnings. Although the term
“tracking stock” was not used, charts in
the supporting presentation highlighted
numerous tracking stock precedents, from
US West in 1997 to three from Liberty
Media. In addition, Einhorn’s slate of
director nominees included Leo Hindery,
former CEO of Malone’s TCI.
GM’s board rejected the proposal as
an “experiment in financial engineer-
ing,” and GM shareholders voted it down.
Opponents cited as weaknesses the same
argument Einhorn called a strength: that it
would not affect manufacturing or profits
but would promote clarity and accurate
pricing. Certain shareholders opposed the
structure because they preferred GM stock
to be undervalued rather than accurately
priced. They cited Buffett’s admonition
that long-term shareholders should pre-
fer discounted prices to enable purchases
with a margin of safety. But the financial
history of trackers suggests something else
afoot: trackers only work when there is a
compelling rationale that management
believes in and where shareholders trust
management to execute it.
Lawrence Cunningham, a professor at
George Washington University, and
Patrick Brennan, founding portfolio
manager of Brennan Asset Management
LLC, are working on a book about John
Malone and financial innovation under
contract with Columbia University Press.
Cunningham is also an editorial board
member of Financial History.
Sources
Anglinger, Patricia L., Steven J. Klepper and
Somu Subramaniam. “Breaking Up is Good
To Do.” The McKinsey Quarterly. 1Q 1999.
Finkelstein, Stuart M., Benjamin Handler and
Joseph K. Todd. “Tracking Tracking Stock.”
Practising Law Institute. 2007.
Glover, Stephen I. Business Separation Trans-
actions: Spin-Offs, Subsidiary IPOs, and
Tracking Stock. Law Journal Press. 2012.
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as they walk among
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available.
Haas, Jeffrey J. “Directorial Fiduciary Duties
in a Tracking Stock Equity Structure: The
Need for a Duty of Fairness.” Michigan Law
Review. 1996. Proud walking tour partner
of the Museum of American
Finance.
Kaden, Alan S., Michael J. Alter, W. Reid
Thompson and Shane C. Hoffmann. “Track-
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Ouzounian, Souren et al. “Highlighting Value
Within: Tracking Stocks and Equity Car-
veouts.” Bank of America Merrill Lynch
Corporate Finance Topics. 2016.
www.MoAF.org | Fall 2017 | FINANCIAL HISTORY 31