Name Games

When AT&T, back in January, canceled plans to issue what’s called a “tracking stock” for its consumer businesses, one might have hoped that corporate America had at last put this gimmick to rest. But Wednesday’s announcement by chemical giant DuPont that it will be issuing a tracking stock for its life sciences business suggests that we still have a long way to go before this fad runs its course.

Buying a share of traditional common stock in theory gives you a small ownership stake in the assets of the company issuing it, a claim on the earning stream of the company, and voting rights in the company. Buying a share of a tracking stock gives you nothing more than a piece of paper–well, not even that anymore–that purportedly represents the performance of a particular division of a company. And while the effective distinction between traditional stock and tracking stock may be slight–since most investors pay little attention to their voting rights and since ownership is so diffuse as to be seemingly insignificant–the theoretical distinction is important.

On the most mundane level, the issuance of tracking stocks reduces investment to pure speculation, since there’s nothing their owners can do to affect the company (that is, they can’t vote out the board of directors or agitate to replace management) and since the tracking stock makes the link between a stock’s price and the underlying value of the company’s earnings stream even more ephemeral.

More important, though, these stocks are a quick way for companies to create the illusion that they’re making real changes in their businesses when in fact they’re doing nothing of the kind. Life sciences, for instance, encompasses pharmaceuticals, biotechnology, and agricultural engineering, all fields that are very hot right now, in stark contrast to DuPont’s traditional heavy-chemical business. By separating out its life sciences business, DuPont hopes to reinvent its public image and reap the benefits of the current (and justifiable) vogue for high-tech and pharmaceutical stocks. “You think we’re a chemical company,” DuPont is saying, “but we’re actually much more than that.”

DuPont’s argument would be that issuing a tracking stock allows the life sciences assets to be valued more fairly, unencumbered by the burden of the rest of the company. But the life sciences assets are not run as a separate company. They’re still part of DuPont, which means they’re managed in the same way that the chemical assets are. If investors have failed to leap on the DuPont bandwagon, despite its strength in life sciences, that may be why.

The irony is that the market is not fooled by tracking stocks in the long term. Although DuPont’s stock jumped 6 percent after the announcement, the experiences of companies like General Motors and Tele-Communications Inc. suggest that tracking stocks rarely unlock value. And that’s predictable. The market is remarkably efficient at judging value. It would be surprising if simply changing the name of something were enough to change the market’s collective mind (in the long run, even adding “.com” to your name probably doesn’t make much of a difference). So let DuPont engage in rhetorical games. In the short run, it may comfort the company’s management to believe that it’s made some real change in its business. In the long run, investors will figure out that calling your porch a balcony doesn’t make your home a mansion.