***OT***QNTM tracking stock. Here is an article mainly on DLJ tracking stock. The article gives the writer's opinion on the possible value of tracking stocks. QNTM is mentioned briefly.
For Personal Use Only
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fnews.yahoo.com
THESTREET.COM
Online Broker
Mar 22, 1999
DLJ's Tracking Strategy Separates DLJdirect From
Online Broker Crowd
By Amy Olmstead
Staff Reporter
With its plan to sell stock in DLJdirect, Donaldson Lufkin &
Jenrette ( (NYSE:DLJ - news) ) will introduce a different type of
stock into the online brokerage arena.
DLJ on Wednesday filed a registration statement to offer tracking
stock for its No. 7 online broker DLJdirect, likely sometime in the
second quarter.
The decision to issue tracking stock, instead of spinning off part or all of DLJdirect, will make
DLJdirect a slightly different animal from its online broker brethren, Ameritrade ( (Nasdaq:AMTD -
news) ), E*Trade ( (Nasdaq:EGRP - news) ) and Charles Schwab ( (NYSE:SCH - news) ).
"A tracking stock is not direct equity ownership," says Scott Sipprelle, co-founder of Midtown
Research Group, a boutique that specializes in new public companies. "It's more of a hypothetical
company."
In contrast, a spinoff, even a partial one, would give shareholders direct ownership of the company,
which is a separate corporate entity.
Tracking stocks aren't that common, though some major companies have used the tactic. And they
denote a different relationship between the company and its parent and between the company and its
shareholders. But that doesn't mean investors should let the strange setup scare them.
"It's a confusing structure, so there are a lot of misconceptions about it," says Peter Blanton of the
equity capital markets group at Credit Suisse First Boston.
For the parent company, a tracking stock can offer the best of both worlds because it retains control
but can raise capital cheaply. Blanton says the parent and the unit that's set up as a tracking stock are
taken as one for credit -- DLJdirect could borrow under DLJ's credit rating -- and tax purposes and,
most importantly, for management control. But the two entities are separated for selling stock.
With DLJdirect's strong growth and its position as a leader in the hot online broker sector, DLJ could
expect the stock to soar, propelling the combined market capitalization of DLJdirect and DLJ
beyond DLJ's current $8.4 billion market cap.
In the registration statement, DLJ said the DLJdirect stock is intended to reflect or track the
performance of DLJdirect. DLJdirect will have separate financial statements from DLJ for the first
time.
While DLJdirect will be a considered a pure play online broker stock, it still will be tied closely to its
parent through the tracking structure. DLJdirect won't become a separate corporate entity. Holders
of DLJdirect shares will be shareholders of DLJ. That setup subjects DLJdirect investors to all the
risks associated with investing in DLJ.
At the same time, DLJdirect shareholders won't have any voting rights, except in limited
circumstances, according to the registration statement. The DLJ board will make decisions for both
DLJ and DLJdirect, and currently no DLJdirect executives sit on the DLJ board.
As a result, problems can arise from the tracking-stock structure, says Blanton. For example, say
DLJ were to incur huge proprietary trading losses, something that doesn't have anything to do with
DLJdirect's operations. Because DLJdirect and DLJ are part of the same company, the damages at
the parent could hurt DLJdirect stock. And if the DLJ board were to make a decision favoring DLJ's
business at the expense of DLJdirect, DLJdirect shareholders would be powerless.
In March alone, several other companies filed to issue tracking stocks. Chemical behemoth DuPont
( (NYSE:DD - news) ) announced it would issue a tracking stock for its life-sciences business, tech
publishing firm Ziff-Davis ( (NYSE:ZD - news) ) announced it would offer tracking stock for its
ZDNet Group and Quantum ( (Nasdaq:QNTM - news) ) said it would replace its stock with two
tracking stocks for its storage systems and disk-drive groups.
While some may squeal about the stepchild status of tracking shares, Blanton at Credit Suisse First
Boston says tracking shares ultimately trade on the fundamentals of the business unit they track. "For
most companies that have done tracking stocks, the shares down the road don't really trade any
differently than if they were carved out or spun out."
Indeed, some tracking stocks have performed strongly. Liberty Media Group ( (NYSE:LMGa -
news) ), the tracking stock of parent Tele-Communications, or TCI, from mid-1995 until TCI's
merger with AT&T ( (NYSE:T - news) ) in March, gained 396% compared with 234% for TCI
during that time. (Liberty is now a tracking stock of AT&T.) Hughes Electronics ( (NYSE:GMH -
news) ), a longtime tracking stock of General Motors ( (NYSE:GM - news) ), gained 155% in the
past five years compared with 66% for its parent.
Some, such as former GM tracking stock Electronic Data Systems ( (NYSE:EDS - news) ),
eventually graduate into separate companies and independent stocks.
At least one money manager says he wouldn't dismiss buying DLJdirect shares just because they're
tracking shares. "I would consider investing in DLJdirect," says Anurag Pandit, part of the small-cap
equity management team at John Hancock Advisors and an investor in the online broker sector. "I
think it's a great service. They've done a great job."
One big uncertainty surrounding tracking stocks is whether their tax advantages will end with the
current federal budget. Currently, a company can issue a tracking stock and record it as a tax-free
transaction. In February, the Treasury Department, in an attempt to raze corporate tax shelters,
proposed eliminating that privilege by forcing companies to recognize a taxable gain. The proposal,
however, would allow some tracking-stock transactions to be grandfathered and exempted from tax.
Copyright © 1999 TheStreet.com, Inc.
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