Media Go For Shadow Shares
Sydney Morning Herald
Wednesday September 15, 1999
America's ``old" media have lost interest in spinning off their ``new" media Internet operations and are heading furiously down the ``tracking stock" road.
One is up and running, several more already have been unveiled by The New York Times, Disney and NBC and investment bankers expect more in the months ahead if the market for Internet shares does not sag again.
The swing away from spin-offs follows widespread acceptance in boardrooms across the US that all companies will have to become Internet companies in future or perish, and it would be a catastrophic mistake to part with control of the future.
The swing towards tracking stocks follows an equally widespread realisation that it is possible to ``have your cake and eat it too" at least in the US sharemarkets, where such stocks have been accepted for years.
Or, in the case of New York-based publishing group Ziff-Davis, whose tracking success helped fire the interest of other ``old" media players, that it is possible to get 100 more cakes with a tracker.
A tracking stock is a market-listed share that tracks a subsidiary's financial performance but does not carry the same voting rights as common shares.
Usually it does not own part of the assets (they are still owned by the issuing parent company); there is no separate board or management; and the tracking stock shareholder generally does not get a vote, even though results are separately reported, and the underlying business remains part of the parent and still contributes to its revenue and earnings.
Sometimes the new shares are distributed among existing shareholders.
Sometimes not, as in the case of Ziff-Davis when it launched its Internet operations as ZDNet. A small number of its shares were issued to the public and the parent kept the bulk of the stock, so ZDNet shareholders are entitled to vote at the Ziff-Davis annual meeting even though ZDNet, which remains part of Ziff-Davis, reports its financial results separately and its shareholders would get the proceeds if ZDNet were sold or liquidated (but that is not common).
The advantage over a spin-off, say investment bankers, is that the subsidiary can still use the parent's credit rating but the ``hidden" value of the subsidiary's business is realised; the parent has a new form of scrip that it can use to buy other Internet operations and provide incentives for its key staff; and, most importantly, the operation is still in-house.
ZDNet produced just 5 per cent of Ziff-Davis's $US1.1 billion in revenue last year not enough to qualify the parent as an Internet stock and produce the quantum leap in its share price that would let it buy other richly priced Internet businesses.
So Ziff offered the public 10 million shares in ZDNet at $US19 each and kept 71 million shares for itself.
On its first day of trading the tracking stock's share price soared to $US36 before closing at $US31.06, giving ZDNet a $US2.5 billion market capitalisation that dwarfed the parent's $US1.4 billion.
Better was to come. ZDNet's share price rocketed to $US55.50 in the following weeks, making it more than three times as valuable on paper as the parent.
Then it slumped. The share price now is below $US14, but other would-be tracking stock issuers do not seem perturbed. The initial success is regarded as an attribute of the tracking stock while the consequent fall is seen as related to Ziff-Davis.
Yesterday Ziff denied that it was negotiating to sell itself to News Corp following rumours that News was considering a Ziff-Davis deal worth as much as $US1.5 billion ($2.3 billion).
Ziff-Davis is known to have been seeking deals intended to increase shareholder value for several months, after hiring investment bankers from Morgan Stanley Dean Witter ``in response to recent third-party expressions of interest" and to ``enhance shareholder value".
The majority shareholder, Japan's Softbank Corp, said recently it intended to focus on companies that operate totally on the Internet.
Despite ZDNet's recent fate, interest is growing in the tracking-stock technique, pioneered by General Motors in 1984 and 1985 when it created separate shares for two of its more glamorous subsidiaries, Electronic Data Systems (EDS) and Hughes Electronics. There are now 40 tracking stocks on the market with the tally buoyed by issues from AT&T, Perkin-Elmer and investment bank/sharebroker Donaldson, Lufkin & Jenrette this year.
Issues by DuPont, JC Penney, Snyder Communications and Quantum are on the way.
Microsoft has been pressured to follow suit for its Internet operations while brick-and-mortar retailers with online divisions, such as Federated Department Stores and Wal-Mart, are said to be considering issues.
Some critics insist that the whole basis for a ``pretend equity" supposedly representing fast-growing or fashionable businesses locked within corporations will disappear with the next bear market or recession, but for the moment it is fascinating the ``old" media.
They had little interest when cable magnate Mr John Malone created the first media tracking stock for Liberty Media last year after its parent, TCI, was taken over by AT&T but that was before the Internet share boom went supersonic.
Now The New York Times says it is thinking about issuing a tracking stock for its Internet businesses; Disney has announced plans to issue one to reflect its Internet business once it absorbs most of the Infoseek portal; and General Electric is sending out its NBC television group-related Internet properties as a tracker as part of a complex deal with Xoom.com and CNet.
The Tribune Co, based in Chicago, also is thought to be a likely tracking stock issuer. CBS, before its recent deal with Viacom, was rumoured to be planning a Net tracking stock; Viacom, in turn, was thought to be contemplating a tracking stock of its MTV.com Internet music business.
© 1999 Sydney Morning Herald
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