Suddenly, there's relief for dysfunctional telco families: tracking stocks.
Have a young, growing division that's misunderstood? Issue a tracker. Is your global communications story being ignored because investors are focused on your underperforming domestic unit? Track it. Want to please your value investors and attract growth fans at the same time? Create a tracking stock.
A bull-market offspring, the tracking stock is reshaping the telecom investment picture for companies. At the moment, all eyes are on
, which is expected to outline its tracking stock plans to analysts as early as Monday. If the Street eats up AT&T's tracking strategy, observers say a flood of imitators could hit the market next year.
But the reception may not be all that warm. In general, the performance of tracking stocks has been uninspiring. They're considered second-class because in most cases they bestow no ownership on the holder and pay no dividends. They simply allow investors to track the financial performance of a division. This makes the strategy particularly appealing to old-guard telcos, which see a rare chance to join the growth-hungry investment market and grab money that might otherwise be headed for a start-up.
What It Is
"A tracking stock is a way for bankers to tell management you can have your cake and eat it too," says Ophelia Barsketis, money manager with
Stein Rowe & Farnham
. "But from the investor's perspective, it's like eating something fat-free and sugar-free. You've got to wonder, 'Why not take a bite of the real thing?' " (Barsketis holds AT&T,
, a tracking stock.)
Trackers have been around since 1984, when
created one for its data-processing subsidiary,
Electronic Data Systems
, which is no longer part of GM.
They've earned little respect in the 15 years since then: On average, just two trackers have been created per year. But that all changed this year, as trackers have come into
fashion. Nine tracking stocks, representing nearly a third of the 29 trackers now in existence, were created this year, according to Mark Minichiello, who tracks the trackers for
, a Chicago-based research firm that hasn't done work for any telcos.
Telecom analysts who were ambivalent about tracking stocks just a few months ago are now touting them as the best way for companies to unlock their performance potential.
Why the sudden change in passion? "There is a huge banking opportunity coming, and that can't be lost on anyone in this sector," says one telecom analyst who asked not to be identified.
Consultants are on board, too. "Our thinking is to get clients to focus in around a particular customer set. And not try to be all things to all people," says John Kinnaman, principal consultant for
IT and communications group. "In that context, tracking stocks can be seen as a move to focus around an industry segment." (PricewaterhouseCoopers has consulted for all the major telcos.)
Sprint PCS is the tracking success story that started the telecom herd in this direction. Since its November 1998 IPO, PCS shares have rocketed 437%, while the mothership Sprint has risen only 85%.
Get in Line
AT&T could do little but look on in envy. The company says it's woefully undervalued, so it's been
mulling a variety of tracking options in an effort to get different valuations for different business parts. Though the original plans called for a separation between consumer and business services, the most recent discussions have focused on creating a tracker for its high-growth wireless services and its network management outsourcing business.
Next in line:
. Last week, Edward Whitacre, chairman and CEO of the nation's largest local phone company, said he was watching the AT&T situation and toying with the idea of setting up his own tracker to "unlock value" for his wireless operations.
Last month, online service provider
said it was going to
create a tracker for Excite, its portal and media business, to help clear up the confusion over its content vs. delivery strategy. Excite and @Home had completed their merger a mere six months earlier.
Even a relatively obscure Canadian firm,
, said it has consulted with investment bankers about putting its underperforming consumer long-distance unit under a tracker. Teleglobe shares have lost nearly half their value since January, and Chairman Charles Sirois says that stems from the company's inability to separate in investors' minds a division with problems from its successful global wholesale business.
But since telecom trackers were born in a bull market, there's no real track record. Observers say all it will take is one real disaster to extinguish some of the excitement.
And, as Minichiello of Spin-Off Advisors points out, most trackers -- aside from Sprint PCS -- have had disappointing results. Of the nine created this year, only three have had positive stock performance, he says.
Says Minichiello, "I would not take the success of any of these trackers for granted."