Were I less refined, I'd describe a tracking stock as a yellow-bellied way of squeezing money out of the market.
Fortunately, being a suave, sophisticated, righteous, silver-tongued and thoroughly admirable person, I prefer this description: It's a yellow-bellied way of squeezing money out of the market.
| DLJdirect: Good investment? |
The latest perpetrator is Donaldson, Lufkin & Jenrette, which generously offers investors the chance to buy tracking shares of DLJDirect, the company's online brokerage unit. DLJ takes your money. You get almost nothing in return. (Disclosure: ZDNet is a tracking stock for Ziff Davis.)
Paul Newman's Henry Gondorff character never had it so good.
Whatever happened to shareholder rights? A tracking stock carries no voting power "except in certain limited circumstances", confers no ownership of the business being tracked, and leaves shareholders entirely subject to the whims of the parent company, even if those whims specifically hurt DLJdirect.
Someone please tell me why this is legal.
(Don't count on getting a straight answer from Wall Street Eminences. If you ever doubted big-time brokerages scratch each others' backs, look at the list of DLJdirect's underwriters: BT Alex. Brown; Goldman, Sachs & Co.; Merrill Lynch & Co.; Morgan Stanley Dean Witter; Salomon Smith Barney. Honor among...?)
It's certainly cowardly. Why should a company be allowed to swim in the ocean without getting wet? If DLJ wants public dollars for DLJdirect, it should accept the risks of public ownership. Instead, management isn't accountable at all, because DLJ keeps complete control.
Almost half of the IPO proceeds won't even fund DLJdirect operations. Subtracting underwriters' fees, today's offering generated more than $295 million, but 31 percent of that goes straight to the parent company, no questions asked. Another 15 percent repays a pair of debts.
The truly unfortunate thing is that DIR buyers won't actually be able to acquire ownership of an operation that seems to be a long-term solid bet, at least relative to other Internet IPOs. Gomez Advisors consistently rates DLJdirect as one of the top online brokers, with the survey's number one spot five out of the last seven quarters. The unit has steadily increased revenue, and actually posted earnings (earnings!) of $7.2 million on revenue of $47.2 million -- a net profit margin of 15.2 percent -- during the first three months of this year.
But if you buy DIR tracking stock, you're not just investing in the online unit, you're assuming the risks of Donaldson, Lufkin & Jenrette as a whole, because every DIR share is equal to a share of DLJ common stock, except that DIR shareholders have the aforementioned dearth of voting rights.
Granted, for all practical purposes, voting power for virtually any publicly-held company rests in the hands of institutional investors anyway. Which is why most institutional investors, except for momentum traders who play at the start of an IPO, stay away from tracking stocks.
That may partly explain why today's DLJdirect reception has been relatively mild. Don't look for the stock to go much higher anytime soon, not with 16 million shares floating around to satisfy demand. In fact, don't look for the stock at all -- look for something you can actually own.
Other tidbits to mull over:
The rest of the technology market was up as of mid-afternoon. With two hours left in regular trading, the tech-heavy Nasdaq Composite Index had gained 15.20 to 2396.10, the S&P 500 was up 9.26 to 1293.66, and the Dow Jones Industrial Average had risen 78.46 to 10609.55. 22GO