Excellent post from the Yahoo! forum, thanks to Herbalslim:
Your thoughts, and the resulting confusion on this issue are, to say the least, reasonable.
One must consider how Wall St. works and what is the actual value of tracking stocks in order to gain perspective. Wall St. is
best viewed as a giant casino. In the casino, the house always wins, getting it's % out of every side of each trade, and getting in
ahead of the crowd and out before. No secret here. The investment houses are combination floor manager/eye in the sky/gaming
commission (!)/croupier. They decide how it all will flow and who gets what. Did you ever wonder why a company is willing to
sell shares in an IPO at $15 when it knows that the shares will go to $60 the first day? Wouldn't it make more sense to auction off
the shares to the market directly and get 45-50 instead of 15?
QNTM management goes to their large bankers and ask how can they get the street to view them as, say, a storage solution
company instead of as a tired old disk driver? Since they were unwilling to divest the divisions, the bankers suggested something
radical for a high tech firm: the tracking stock. Never been done in the valley before. (Banker T. Flanagan -" yeah, we'll issue
uh.......tracking stocks, yeah....that's the ticket!")
Tracking stocks exist primarily because some companies find themselves in different businesses that are valued in different ways
by investors. GM is an excellent example. The car business has a different set of multiples than does say Hughes Electronics, or
EDS. The street likes tracking stocks because they can value each segment according to the values accorded it's particular sector.
For the street, if the #s are broken out, it is easier for them to keep track of. For companies, it is a way of getting a higher value
overall for all of the pieces. GM is compared to Ford, but why would you compare GM/Hughed/EDS to Ford. Too confusing for
the overloaded brains of the street community.
Now, if you are a company (QNTM) in a low PE cyclical business with a division that has achieved critical mass and the steet
accords a substantially higher multiple to, you think, hey, tracking stock - that's the ticket. No muss, no fuss, more money for us!
You are correct - it is still one board, one company, one balance sheet etc. But the street always values tracking stocks as defacto
spinoffs. Hence, QDSS + QHDD = the value of each if it were spunoff on it's own. That is how it works. If you don't like it,
follow your gut and steer clear.
But, if you think it is just a gimmick, remember that the bankers for QNTM, some pretty heavy hitters, are incentivized to
maximize the value of this transaction 3 months out. Remember, the house always wins.
I keep the following taped to my terminal (it is rather pedestrian, but succinct and to the point):
Follow the money,
Follow the money.
Bankers are bees,
they'll lead you to honey.
I LOVE investment bankers!
Regards,
Herb |
