Electronic-vehicle makers’ stocks (EVs) are among the hottest investments on the market today. For example, the market cap of Tesla TSLA,
Still a start-up worth over $1 trillion despite celebrity status and Rivian Automotive RIVN,
A start-up EV maker that just went public, raised over $100 billion. Meanwhile, the market cap of the titans of the automotive industry, while higher, remains relatively modest. For example, Ford Motor F,
$76 billion and General Motors GM,
at $84 billion.
The vast difference in multiples probably reflects a longstanding investor preference for pure-play businesses over more diversified businesses. Pure-play is easier to understand, provides greater visibility into the business, and can also entice high growth and expectation-based investments. One thing we can guess is this: investors with an appetite for EVs are different from those who invest in traditional car companies.
Ford and GM could easily wind up those businesses, but there are almost certainly valuable benefits for these automakers to continue to incubate EVs alongside traditional vehicles. But that doesn’t mean the giants can’t create a little more visibility — and valuations — for their EV businesses. answer: tracking stock,
GM was really a pioneer in doing this when it hired colorful Texas billionaire H. The tracking stock was invented to solve a problem for Ross Perot. GM acquired Perot’s company, Electronic Data Systems (EDS). He and many of his employee-shareholders were concerned that EDS’ performance would be lost within the GM giant.
They wanted to make sure that EDS’ superior performance would be rewarded regardless of how the rest of GM performed, including the relative time horizons of each company. Solution: EDS Group accepted shares in GM, but performance was tied to the economics of EDS and the associated time horizon, referred to as “Class E” stocks.
The invention was so effective that GM copied it the following year, acquiring Hughes Aircraft Company – using the currency GM “Class H” stock. Both trackers remained in place for more than a decade, until GM discontinued the units, distributing all of GM’s stock to GM shareholders to become freestanding companies. GM’s tracking stock worked so well for all concerned that the model has been copied multiple times.
For example, in 1991–92, the US Steel Corporation enjoyed synergy through common control of diversified subsidiaries such as the Delhi Group and Marathon Oil, which shared gas-processing plants and together less than once were independent. Enjoyed the borrowing cost. But businesses had different economics so that a tracking stock would retain the benefits of both common controls, while increasing visibility into the tracked business would have benefits for stockholders and managers alike. The solution worked for a decade until USX discontinued Marathon Oil.
In 1995, following a breakdown of AT&T’s distrust of the government,
US West was a regional telephone company that also owned cable and cellular assets. Long-term investors attracted to the stability of the telephone utility away from the volatility of media assets; Short-term investors seeking rapid growth had the opposite taste.
The trackers met the demand of each, housing all the functions under common control, synergies related to harvesting. To further cater to the tastes of investors, the utility side paid regular dividends as the media side reinvested the proceeds. The best part was that the system could be tweaked as circumstances changed. In fact, in 1998, the US West exited the media business after synergies proved elusive.
In the mid-1990s, iconic investor and telecoms mogul John Malone used trackers to split the economics of various media assets, which he called TeleCommunications Inc. (TCI) for decades. In addition to other benefits ranging from antitrust to taxes, Malone felt that cable assets with programming, for example, were better combined from an operational standpoint than separate. Yet they displayed different economic characteristics. Using tracking stock for such businesses can translate into higher price-earnings multiples, which can be valuable when using the stock to acquire other companies.
As for the downsides, as iconic investor Bill Ruen once lamented: On Wall Street, the process goes from innovation to imitation to irrationality. The same was true for trackers, as they spread through the technology sector in the late 1990s. A common theme involved a traditional company offering trackers in an Internet subsidiary – critics complained that helped fuel the irrational enthusiasm that fueled the bubble.
Debate ensued over the trackers, with some dismissing them as mere financial engineering that did nothing to increase fundamental value. Champions argue that they are a real financial achievement that increases value by cleverly combining assets to satisfy individual investor appetites while maintaining economic efficiency.
The truth is more mixed: some trackers are mere engineering and some are real achievements. The issue becomes whether there is a compelling argument for a particular tracker. Ford and GM both seem to have compelling arguments for offering tracking stock for their electronic-vehicle businesses. It would certainly be easy to name them: “Class EV” stocks.
Lawrence A. Cunningham is a professor at George Washington University, the founder of quality shareholder group, and the publisher, since 1997, “Warren Buffett’s Essays: Lessons for Corporate AmericaFor an update on Cunningham’s research on quality shareholders, visit register here,
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