1. IPO Basics: Introduction
  2. IPO Basics: What Is An IPO?
  3. IPO Basics: Getting In On An IPO
  4. IPO Basics: Don't Just Jump In
  5. IPO Basics: Tracking Stocks
  6. IPO Basics: Conclusion

Closely related to a traditional IPO is when an existing company spins off a part of the business as its own standalone entity, creating tracking stocks. The rationale behind spin-offs and the creation of tracking stocks is that in some cases individual divisions of a company can be worth more separately than as part of the company as a whole. For example, if a division has high growth potential but large current losses within an otherwise slowly growing company, it may be worthwhile to carve it out and keep the parent company on as a large shareholder, and let it raise additional capital from the public. For example, during the dotcom bubble, many established companies that created internet subsidiaries spun them off, such as Walt Disney Corp. (DIS) which issued a tracking stock for its internet property Go.com. Telecom companies AT&T (T) and Sprint also once created tracking stocks for their wireless divisions. These tracking stocks no longer exist, since they’ve either been acquired by other companies, or have gone out of business.

From the parent company's perspective, there are many advantages to issuing a tracking stock. The company gets to retain control over the subsidiary but all revenues and expenses of the division are separated from the parent company's financial statements and attributed to the tracking stock. Importantly, if the tracking stock rockets up, the parent company can make acquisitions with the subsidiary's stock instead of cash.

While a tracking stock may be spun off in an IPO, the mechanics are not the same as the IPO of a private company going public. This is because tracking stocks usually have no voting rights, and often there is no separate board of directors looking after the rights of the tracking stock. This doesn't mean that a tracking stock can't be a good investment. Just keep in mind that a tracking stock isn't a normal IPO.


IPO Basics: Conclusion
Related Articles
  1. Small Business

    What's a Subsidiary?

    A subsidiary is a corporation owned 50% or more by another corporation. The owning corporation is usually called the parent or holding company. A company that is 100% owned and controlled by ...
  2. Investing

    3 Reasons Tracking Error Matters

    Discover three ways investors can use tracking error to measure performance for a mutual fund or ETF, whether indexed or actively managed.
  3. Investing

    What is a Spinoff?

    Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs.
  4. Investing

    Comparing Spin-offs, Split-Offs and Carve-Outs

    Spin-offs, split-offs and carve-outs are three methods a company can use to divest certain assets, a division or a subsidiary. Here's how they differ.
  5. Investing

    The Alphabet Soup Of Stocks

    Are the countless stock categories leaving you puzzled? Here we help you sort through the confusion.
  6. Investing

    5 Reasons Why Spinoff Companies Can Be a Buy for Investors (ABBV, ABT)

    Learn how investors can profit from investing in spinoff companies, and discover two ETFs that offer exposure to a basket of spinoff stocks.
  7. Investing

    Sneaky Subsidiary Tricks Can Cloud Financials

    Use consolidated financial statements to uncover a parent company's true performance.
  8. Investing

    How To Build A Budget

    Learn the basic steps towards building a system to track your money and control your spending.
Frequently Asked Questions
  1. Do interest rates increase during a recession?

    Learn why interest rates do not rise in a recession; in fact, the opposite happens. Identify the factors that reduce interest ...
  2. What is the difference between deflation and disinflation?

    Learn what deflation and disinflation are, how supply and demand affect price levels, and the difference between deflation ...
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ...
  4. What does CHIPS UID mean?

    Learn what CHIPS UID stands for and how it facilitates the transfer of funds as the back-end of the ACH network for both ...
Trading Center