TRACKING STOCKS AND THE ACQUISITION OF REAL OPTIONS

Despite their wellpublicized conflict of‐interest problems, tracking stocks can be a superior alternative to equity carveouts in a particular, though increasingly common, set of circumstances—namely, when companies launch highrisk, capitalintensive startups that are expected to have valuable future synergies with their main operating divisions. Like equity carveouts, tracking stocks reduce the well‐known conglomerate discount by exposing the startups directly to capital market discipline and incentives. But, in contrast to carveouts, tracking stocks leave strategic and operating control in the hands of single board of directors and management team. This feature of tracking stocks is likely to add significant value by reducing the eventual cost of integrating the startup operation into the firm's core operations. The author supports this view by comparing the different approaches taken by two telecommunications companies, BCE and Sprint, in financing (and later integrating) their wireless communications services.