The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 1, August 2000, Panel Publishers, New York, NY.


By Robert W. Wood

A few years ago, tracking stock was all the rage. Now, the response to tracking stock when issued is sometimes lukewarm. Still, the is a fair amount of interest in tracking stock, and issuances is of it have not disappeared. For a recent catalogue, see Natusch, "Non-Tax Motivations For Tracking Stock?", Vol. 8, No. 6 M&A Tax Report (Jan. 2000), p.1.

All the News That's Fit To Track?

A recent example involves the pre-eminent New York Times. The New York Times company has now received shareholder approval to create tracking stock for its Internet unit. See Rose, "New York Times Holders Approve Plan To Create Internet Unit Tracking Stock, " Wall Street Journal, May 24, 2000 page B1. Yet, apparently, New York Times class A shareholders were nonplused.

I'm not sure why. The Times is the first newspaper company to announce plans to launch a tracking stock for an Internet unit, denominated "New York Times Digital." Other publishers are said to be watching closely. They are watching closely because many other media companies may either want to pursue a tracking stock issuance, or do a full fledged spinoff of their Internet assets. Market turmoil has caused many people to sit back and try to ride out this particular "Perfect Storm." For example, Viacom Inc's MTVi, which operates the company's music websites, is said to be sitting tight for the moment.

All About Tracking

Tracking stock, of course, is a class of equity designed to track the performance of a specific unit. It is used where management thinks the value of that unit is not reflected in the company's overall share price. Maybe it is the poor man's spinoff. Perhaps because of this, I'm not sure that the advent of the tracking stock hasn't done a great deal to hurt the viability of many spinoffs. As a truly separate entity, after all there is less of a mandate where the tracking stock will achieve essentially the same economic results as the spinoff.

AT&T Too?

AT&T, in a dither over its own stock price problems, is said to be considering issuing several lines of tracking stock. One issuance would cover its consumer long distance business, one would cover its cable TV unit, and other divisions would also be likely candidates. See Caulay, " AT&T Considers Tracking Stocks To Boost Its Sagging Share Price," Wall Street Journal, June 30, 2000, p. B6.

Interestingly, this is not the first time that AT&T has considered using tracking stocks (and several tranches of them) to increase shareholder returns. Last fall, one approach posited by AT&T would have issued three distinct stocks to track the performance of AT&T's wireless unit, its cable and Internet ventures, and its outsourcing unit for businesses. See Caulay, "AT&T Considers Tracking Stocks to Boost Its Sagging Share Price," Wall Street Journal, June 30, 2000, p. B6.

Tracking The Future

The tax treatment of tracking stock has been much debated. Still, properly structured, the issuance of tracking stock can be tax-free to both the issuing company and the shareholders. The New York State Bar Association (NYSBA) stated that "...there appears to be a significant question as to whether non-tax business motivations have been giving rise to tracking stock arrangements, and whether the arrangements might alternatively be implemented in a way that does not give a tax avoidance opportunity." (NYSBA, Tax Section, Corporations Committee: Report Regarding "Tracking Stock" Arrangements, in: The New York University Tax Law Review, 1987, p.77).

The legislative and regulatory environment including recent changes to section 355, has certainly had an impact on tracking stock issuances. However, empirical studies show that there are also significant non-tax motivations. There are six studies (one German and five U.S.), which differ with regard to subject, time period, and other details. Nevertheless, the number of companies that have actually issued tracking stock is relatively small. You may find this surprising. Indeed, from a research perspective, the samples are too small to generate statistically significant results. Time will tell whether all this will happen. But in the current climate, it is interesting to see tracking stocks again rising to the surface.

Tracking Stock Not Dead Yet, Vol. 9, No. 1, The M&A Tax Report (August 2000), p. 7.