Ebook Long-term effect on shareholder value in a Tracking Stock Equity Structure
Corporations are seeking to maximize shareholder value, particularly in the strong equity markets that have prevailed during the last couple of years. Berger and Ofek (1995), Lang and Stulz (1994), Billet and Mauer (2000) discuss whether a corporation’s overall valuation fully reflects its constituent parts or subsidiaries. The question appears to be especially important for large, diversified corporations whose’ publicly traded shares trade at a discount compared to more pure play peers or to the sum of the stand-alone values in their separate businesses. These papers suggest that internal capital markets are inefficient and that this is a major factor underlying the diversification discount. Further, investors and research analysts may not always have the necessary industry knowledge to fully analyze companies with multiple business lines or elusive corporate structures. To increase transparency and decrease the trading discounts, corporations have completed restructuring transactions that highlight certain divisions, separate others or carve a portion for public shareholders. The number of restructuring transactions has grown substantially in recent years as managers’ aim to increase their shareholders wealth by creating a stronger corporate focus (Miles and Woodridge (1999)).
Debates, in for example e-zines, also arise over whether a certain restructuring transaction will permit greater shareholder recognition and a higher value or whether it will detract from the core value. These transactions include spin-offs of non-core businesses, subsidiary carve-outs that often are initial public offerings of high growth businesses, split-offs of corporations or tracking stocks that follow the performance of subsidiaries that still remain part of the parent corporate entity.
Tracking stock is a relatively new equity-based restructuring method where a class of common stock aimed to track the performance of a specific business or division within the parent group. The formation of a tracking stock equity structure does not create a new corporate entity but retains the consolidated organizational form. This is different from a normal carve-out or spin-off that creates a new entity by selling or distributing equity to shareholders. The foremost reason for implementing a tracking stock structure instead of using one of the traditional ways is that the parent company does not relinquish control of its equity ownership in the tracked group. Holders of the tracking stock are considered shareholders of the parent corporation, not of the tracked business segment. A single board of directors oversees the entire corporation, including the tracked business units. Further, the assets of the tracked business segment continue to be assets of the parent entity and can be used to satisfy any of the corporation’s liabilities. The individual tracking stocks of a single company may have different dividend, voting, liquidation, and redemption provisions, presumably to tailor the stock to the characteristics of the business unit the stock is intended to reflect.
In 1984, General Motors became the first company to implement the tracking stock equity structure, as the automaker sought to set up arrangements for post-acquisition control of Electronic Data Systems and Hughes Aircraft. By issuing tracking stock, the shareholders of the acquired companies did not have to take GM stocks in consideration. In 1991-92, USX Corporation became the first company to use tracking stock as a vehicle for separating businesses, creating different classes of parent stock for its steel and energy operations. Following several other issuance’s in the early 1990s, this rationale was tested by the market in the mid 1990s when proposed tracking stocks for RJR Nabisco and Kmart were pulled , owing to concerns about business viability, funding plans and bankruptcy issues.
There are four purposes of this paper. First, to explain the basics regarding a tracking stock equity structure. Second, to investigate whether the implementation of a tracking stock enhances long-term shareholder value. Third, to evaluate whether the choice of distribution method affect the long-run shareholder value. Finally, to examine the markets reactions to the parents attempt to create a stand-alone entity under the corporate umbrella.
contents
Table of contents
1. Introduction
2. Tracking stock
2.1 The instrument
2.2. Aspects of a tracking stock equity structure
- 2.2.1. Advantages
2.2.2. Disadvantages
2.3. Alternative forms of equity restructuring and mode of issuance
- 2.3.1. Spin-off
2.3.2. Equity carve-out
2.3.3. Split-off
2.3.4. A comparison
2.4 Hypotheses
3. Data and Methodology
3.1. Data
3.2. Methodology
- 3.2.1. Buy-and-hold abnormal return (BHAR)
3.2.2. Mode of issuance
3.2.3. Correlation
4. Results and Analysis
4.1. BHAR - Parents
4.2. BHAR - Tracking stocks
4.3. Mode of issuance
4.4. Correlation
4.5 Additional Analysis
4.6. Further studies
5. Conclusions
6. References
APPENDIX 1
The statistical test
APPENDIX 2
APPENDIX 3
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