| BUSINESSWEEK ONLINE : DECEMBER 13, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
Commentary: AT&T: To Track or Not to Track The chairman of AT&T (T) has lots of experience with so-called tracking stocks--most of it bad. C. Michael Armstrong ran General Motors Corp.'s Hughes satellite division when GM's H class was one of the first of these oddball equities. When GM sold parts of Hughes, holders of H shares sued GM's board, complaining of unfair treatment. This year, at AT&T, Armstrong allowed John C. Malone to make cable programmer Liberty Media (LMGA) into a tracking stock that's nominally owned by AT&T. Shareholders are complaining that Liberty got all the goodies, including rights to fill a dozen or more channels on AT&T's upgraded cable systems--and $1.8 billion in valuable tax-loss carryforwards. Yet, Armstrong is set to announce a tracking stock tied to AT&T's fast-growing wireless business. Is he asking for trouble? Experience shows that a tracking stock can pit classes of shareholders against one another, leading to knotty lawsuits. TAX GAINS. To be sure, tracking stocks have their good points. The shares represent ownership in an overall company but are tied to the performance of a particular unit. They can unlock the value of a fast-growing but low-profit business submerged in a profitable but slow-growing parent. Sprint Corp.'s PCS Group (PCS) tracking stock has soared 400% since its issue last year. Unlike spin-offs, which also unlock value, tracking stocks save on tax: Losses from the new business can be applied against profits generated by the rest of the business. Tracking stocks in high-flying businesses can be used as compensation to secure the services of top executives. And their high valuation makes trackers ideal currency for acquisitions. All that said, tracking stocks have a serious drawback that in some cases may not become apparent for years: They create divisions between shareholders that could put one group or the other at a disadvantage--or complicate board-level decision-making to the point of paralysis. Take AT&T. Today, it's sensible for AT&T's board to tilt investment toward the wireless business, because that's where the best prospects for growth are. But if AT&T splits its shareholder base by creating a tracking stock for wireless, holders of shares representing the rest of AT&T will have every right to cry foul if even a penny of AT&T earnings are diverted to wireless--since none of the profits from wireless will ever go to them. Liberty Media's Malone, for one, was obviously aware of the potential for conflicts. Malone insisted, for example, that Liberty maintain its own independent board when he hammered out his deal. Why haven't these conflict-of-interest issues arisen with other tracking stocks? With the longest-standing issues, they have. Shareholders of both of GM's letter stocks sued in Delaware Chancery Court claiming they were underpaid when GM sold part of Hughes and all of Electronic Data Systems Corp. (EDS) The court dismissed both suits this year, but the E-class holders appealed. A decision by the state Supreme Court is pending. Lawsuits are likely to multiply. While shareholders don't worry about conflicts when they're handed tracking shares, over time, shareholder groups get more distinct--and more antagonistic. There may be cases where the tax and market-perception advantages of tracking stocks are so strong that they overwhelm conflict-of-interest concerns. But Armstrong and his peers at other companies need to know they're treading on land mines. By Peter Coy Coy is associate economics editor. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Is AT&T Ready for Liftoff? TABLE: Four Fronts for AT&T Commentary: AT&T: To Track or Not to Track INTERACT E-Mail to Business Week Online | |||
