Tracking Stock

A Tracking Stock (also known as a Letter Stock or Targeted Stock) is a specialised class of shares issued by a parent company to reflect the financial performance of a particular division, subsidiary, or business segment within the organisation. Unlike traditional common stock, which represents ownership in the entire company, a tracking stock allows investors to focus on and invest in a specific part of the company’s operations while remaining under the parent company’s overall corporate structure.
Tracking stocks are primarily used by large diversified corporations that want to highlight the value of a successful or high-growth division without undergoing a full spin-off or corporate restructuring.

Definition and concept

A tracking stock is a security that tracks the performance of a specific business unit rather than the company as a whole. The issuing company creates this separate class of shares so that its market value, dividends, and earnings reports reflect only the financial results of the targeted division.
While tracking stockholders benefit from the performance of the tracked segment, legal ownership and control remain with the parent company. This means that the parent retains full authority over corporate decisions and operations, even though the tracking stock is traded separately in the stock market.
Example: If a large conglomerate like Company A has a fast-growing technology division, it may issue “Company A Tech Tracking Stock.” Investors who believe in the tech division’s potential can invest specifically in that stock without exposure to the company’s slower-performing businesses, such as manufacturing or retail.

Purpose of issuing tracking stocks

Companies issue tracking stocks for a range of strategic, financial, and managerial reasons:

• Highlighting undervalued divisions: To give investors a clearer view of a subsidiary’s performance, especially if it is overshadowed by other operations.
• Raising capital: To attract investment directly into a promising business line without diluting ownership of the parent company’s core operations.
• Retaining control: To monetise part of a subsidiary’s value while keeping it under the parent company’s management and legal control.
• Employee incentives: To align employee compensation in a specific division with its performance through stock-based rewards.
• Strategic flexibility: To prepare for a potential spin-off or sale in the future, allowing gradual market valuation and investor feedback.

Structure and operation

Tracking stocks function similarly to regular shares but differ in how their performance and governance are determined.

1. Issuance: The parent company creates a new class of stock, linked to a particular business segment, and defines its financial parameters in the corporate charter.
2. Financial reporting: The company provides separate financial statements for the tracked division, allowing investors to evaluate its performance independently.
3. Trading: The tracking stock trades on a public stock exchange under a distinct ticker symbol. Its market price depends largely on the performance and prospects of the tracked division rather than the parent company’s overall results.
4. Dividends: Dividend payments on the tracking stock are based on the earnings of the targeted segment, though the parent company retains discretion over their declaration.
5. Voting rights: Tracking stocks often carry limited or no voting rights, meaning investors have minimal influence over corporate governance decisions.
6. Ownership: Holders of tracking stock have economic exposure to the specific business unit but do not have a direct ownership interest in its assets — those assets remain under the parent company’s control.

Example of tracking stock issuance

Case Study: The Walt Disney Company and Internet Group (2000)In 1999, Disney issued a tracking stock for its internet division, go.com, to reflect the performance of its rapidly expanding online media operations. The stock allowed investors to capitalise on the growth of the internet sector without separating it from Disney’s core entertainment businesses. However, as the dot-com bubble burst, the tracking stock’s value declined, and Disney later retired it.
Case Study: Liberty Media CorporationLiberty Media is one of the best-known companies to use tracking stocks extensively. It has issued multiple tracking stocks representing different holdings, such as Liberty SiriusXM Group (LSXMA) and Liberty Formula One Group (FWONA), allowing investors to target exposure to specific entertainment or media assets.
Case Study: Dell Technologies (2016)Dell issued a tracking stock, DVMT, to represent its interest in VMware after acquiring EMC Corporation. The tracking stock helped Dell raise capital while preserving indirect ownership of VMware. It was later bought back as part of Dell’s corporate simplification.

Advantages of tracking stocks

1. Valuation transparency: Tracking stocks make it easier for investors to assess the true value and profitability of distinct business segments.
2. Targeted investment: Investors can selectively invest in divisions they believe have higher growth potential.
3. Capital efficiency: Companies can raise funds for a specific segment without diluting the parent’s overall ownership or control.
4. Performance incentives: Linking employee compensation to a specific business unit’s success can improve motivation and accountability.
5. Strategic flexibility: The company can later spin off or merge the tracked business more easily, as its financial performance is already separated for market evaluation.

Disadvantages and risks

1. Complexity: Tracking stocks complicate corporate structure and financial reporting, making governance and accounting more challenging.
2. Control imbalance: Investors in tracking stocks usually have little or no voting power, leaving control entirely with the parent company.
3. Potential conflicts of interest: The parent company might prioritise its main shareholders or manipulate intra-company transactions to benefit one class of shareholders over another.
4. Perceived risk: Since assets legally belong to the parent, tracking stock investors have limited protection if the parent company faces bankruptcy or financial distress.
5. Market confusion: Investors may misunderstand the relationship between the tracking stock and the parent, leading to pricing inefficiencies or misaligned expectations.

Accounting and financial treatment

In financial reporting, the parent company must:

• Provide separate earnings statements for each tracked division.
• Clearly disclose allocation of revenues, costs, and liabilities between the divisions.
• Maintain transparency regarding dividend policies and inter-company transactions.

Tracking stockholders generally have no claim to the tracked division’s assets or income in a legal sense; rather, their returns depend on how the parent allocates and reports performance.

Tracking stock vs. spin-off

A tracking stock thus offers a temporary and flexible alternative to a full spin-off, useful for short- to medium-term strategic goals.

Regulatory and market considerations

Tracking stocks are regulated like other public securities under securities laws. Companies must comply with disclosure and reporting obligations imposed by financial authorities such as the U.S. Securities and Exchange Commission (SEC) or the UK Financial Conduct Authority (FCA).
However, because the underlying businesses are not legally separate, regulators often scrutinise tracking stocks closely for potential conflicts of interest, corporate governance issues, and misleading disclosures.

Contemporary relevance

The use of tracking stocks peaked in the late 1990s and early 2000s, during the technology boom, as conglomerates sought to capitalise on market enthusiasm for specific sectors like internet and telecoms. Their popularity later declined due to complexity, poor investor understanding, and conflicts of interest.
In recent years, however, interest in tracking stocks has revived in sectors such as media, technology, and energy, where companies own diverse portfolios and seek innovative capital structures. The approach allows large firms to unlock value without complete separation of their business units.