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Why Tech Companies Should Consider Tracking Stocks

When investing in big successful, founder-controlled companies like Google and Amazon.com, investors have to take the good with the bad—the hugely profitable core business along with the whimsical, money-losing efforts to find new opportunities. But given that stocks of both have underperformed the market in the past 12 months, it’s clear that not all investors are willing to accept the tradeoff.

So what’s the answer? In many companies where growth in one business is slowing while accelerating in another, activist shareholders are successfully pushing for one segment to be spun off into a separate public company.  

But spin-offs don’t necessarily suit management, particularly when they’re also big shareholders, which wants to hold onto older businesses and invest in new areas, as appears to be the case with both Google and Amazon.

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That highlights the broader issue, which is that executives like Mr. Bezos don’t care about short-term reaction on Wall Street to their strategies, and they won’t engage in financial engineering to respond to it. At least, he won’t care until the day he has to care, when investors become so dissatisfied it becomes a real issue. Then, the idea of a tracking stock might seem like a decent compromise over a full breakup of the company.

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Joe Lonsdale
Joe Lonsdale
Founding Partner, Eight
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Chamath Palihapitiya
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Ruchi Sanghvi
VP Operations, Dropbox
For companies which want to retain a disparate mix of assets, though, trackers offer some real advantages. One is tax optimization.