Tracking Stock
A tracking stock is a class of equity security issued by a parent company whose financial performance and dividend rights are tied to the performance of a specific subsidiary or business unit, rather than the parent company as a whole.
Tracking stocks were popular in the late 1990s and early 2000s as a way for diversified conglomerates to highlight the value of fast-growing divisions — particularly technology and internet subsidiaries — that were being obscured within a larger, slower-growing corporate parent. By issuing a separate class of stock tied to the subsidiary's financial performance, the parent could allow investors to buy exposure to the high-growth unit without completing a full separation.
The economic design of a tracking stock is complex. Shareholders who hold tracking stock are still legally shareholders of the parent company, not owners of the tracked subsidiary. The subsidiary's assets remain the property of the parent and can be used to satisfy parent-level liabilities. The tracking stock has no direct legal claim on the assets of the specific business it tracks — it is an accounting construct, not a legal separation. This distinction matters greatly in insolvency: tracking stock holders are creditors of the parent, not the subsidiary.
Tracking stocks also introduce significant governance complications. Because the parent's board governs both the tracking unit and the parent's other businesses, conflicts of interest are inherent. Capital allocation decisions, intercompany transfer pricing, and overhead allocations between the tracked and non-tracked businesses all affect the financial results attributed to each unit and can be adjusted by a board that simultaneously represents both. Minority investors in tracking stocks have limited recourse if they believe the board is allocating resources unfavorably.
Dell Technologies issued a tracking stock for its VMware subsidiary in 2016 as part of the complex structure surrounding its acquisition of EMC. Liberty Media has issued various tracking stocks over the years to highlight different asset clusters, including the Formula One Group and SiriusXM Holdings. These structures are often criticized by governance advocates for their opacity and complexity.
Most tracking stocks have ultimately been unwound — either converted into full spin-offs, bought back by the parent, or restructured. The academic literature suggests that tracking stocks typically trade at a discount to the value they would achieve if the tracked business were fully separated, reflecting the legal and governance risks inherent in the structure.