Golden Capital Securities
Investment Outlook
September 2000
As
people return from holidays and check their portfolios, many will likely be
pleasantly surprised that the carnage has, at least temporarily, slowed.
Since the beginning of summer (we'll assume June 1st), the TSE is the big
winner over its American counterparts. Up 17.8% since the June 1st, the
TSE 300 index narrowly beat the NASDAQ (up 17.4%), the S&P500 (up 4.8%) and
the DJIA (up 5.3%). However, if we remove Nortel's 40% plus run during
that time, we see an approximately 5.4% return for the TSE 299. The CDNX
has been nearly flat for the entire summer as investors look to companies with
more proven technologies, earnings and liquidity. However, in the last week of the month of August there has
been a general strengthening and increased volume within the index. It
would appear that investors have shaken off the beatings that they took in
March and April and are slowly stepping back into the marketplace; hopefully a
little wiser and more disciplined.
Telus (T-T), relatively fresh off its amalgamation with BC Tel, has now
become the country’s second largest phone company with its purchase of Clearnet
Communications. For the low, low
price of $3.1 Billion in cash and stock, Telus purchased all of Clearnet’s
subscribers, but all of their debt as well. In hopes of realising some of the hidden value in their own,
now substantially larger, wireless division Telus is entertaining the thought
of issuing a tracking stock.
Since
tracking stocks are not as popular in Canada as they are in the US, some people
may be wondering what a tracking stock is and if they would be worthwhile
investments. Generally speaking, a tracking stock is an attempt by a
diversified firm to unlock the value of an individual business unit from its
overall valuation. The true worth
of this ‘undervalued’ business unit may not be fully realised by the market and
is normally termed a “conglomerate discount”.
The
structure of a tracking stock is significantly different from a common share,
but with many of the same characteristics. With a common share, shareholders own a piece of the company
in which they are investing. Whereas
a tracking stock, by comparison, is a share that pays a dividend based on the
operating unit’s performance. For
example, AT&T Wireless (AWE-N) is a tracking stock for AT&T’s (T-N)
wireless group. Sprint, Nortel,
Microsoft, Lucent and GM have all considered or have issued tracking stocks as
well.
As an
autonomous unit, a tracking stock would allow investors to view more
transparency in the financial data to determine the economic viability of the
unit since the tracking stock would file separate financial statements from its
parent. For company’s management,
the autonomous unit would permit closer handling of factors directly affecting
the business. Finally, in this era
of acquisition, companies of similar industries can be purchased using the
tracking stock, rather than the parent company’s stock. This type of acquisition prevents any
direct dilution of the parent company’s stock and a more comparable exchange of
equity. For example, wireless
stock for wireless stock, rather than large conglomerate stock for wireless
stock. Unfortunately, tracking stocks are sometimes issued when senior
executives feel that the stock market has not recognised their theoretical management
brilliance, rather than unlocking true value that has been created in
the company.
But all
is not as rosy as it may appear, as investors in tracking stocks recently can
attest. There are some negatives
for the tracking business unit as well as for the investor. On a corporate level, the tracking
stock will increase the level of corporate complexity with multiple filings of
documents, accounting, and lines of reporting. The tracking stock’s management also has issues around their
position in the corporation’s culture and the allocation of bonuses to managers
inside and outside the tracking stock unit. Finally, with all the increased business unit disclosure,
detailed corporate information will be more readily available to competitive rivals.
For
investors, some tracking stocks do not have voting rights and as such investors
will not have a say in the corporate direction, much less the specific business
unit. If the tracking stock is not
completely autonomous, the parent still controls the potential suitors in the
case of a merger, thus restricting the potential marketability of the
unit. Take AT&T Wireless as an
example again. AWE is currently
trading at around $5,000 per subscriber, compared to $8,000 per subscriber for
most of its competitors. However,
while trading at these low levels, it has the second highest revenue per
subscriber in the industry. Under
normal circumstances this would be a prime candidate for a take-over: high
revenue, low market capitalization.
This is not the case though, as potential suitors must approach Ol’ Ma
Bell about any potential mergers, a difficult task to say the least.
Overall,
tracking stocks are a way for investors to achieve “pure-play” investments in
companies that would otherwise be too diversified to offer industry specific stock
performance. Companies see the
value in tracking stocks because they can, if structured and managed properly,
help fund a rapidly growing portion of their business without dealing with the
hassles of a spin-off. Are
they right for you? Talk to your
financial advisor or broker, they will be able to help you determine a tracking
stock’s appropriateness.
Have you
ever wondered what happened to that high-tech IPO that zoomed 500% on its
initial day of trading and then seemed to fall off the face of the earth?
There are several sites that take a light-hearted (although cynical) look at
the many fallen and walking wounded high-tech firms. Dotcom.Failures has the motto
"Kick 'em while they're down" and up to date stories about recent
business failures and companies teetering on the edge. Start-up Failures, an
online support network designed to take the shame out of failure, is run by an
entrepreneur who has himself failed several times. Finally, the unprintable ****** Company.com. This
take-off of the popular Fast Company magazine allows readers to submit their
picks for companies about to go out of business and earn points and bragging
rights. These sites allow those of us who did
not become millionaires in the Internet hype, to laugh at those who did and
then lost it all.
Until
next month.