With its plan to sell stock in
Donaldson Lufkin & Jenrette
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,
"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
announced it would issue a tracking stock for its life-sciences business, tech publishing firm
announced it would offer tracking stock for its
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
, the tracking stock of parent
, or TCI, from mid-1995 until TCI's merger with
in March, gained 396% compared with 234% for TCI during that time. (Liberty is now a tracking stock of AT&T.)
, a longtime tracking stock of
, gained 155% in the past five years compared with 66% for its parent.
Some, such as former GM tracking stock
Electronic Data Systems
, 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
, 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.