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I'm curious about tracking stock.

Take, for example, NASDAQ:DVMT. It's a tracking stock issued by Dell for VMWare (NASDAQ:VMW), which is partly owned by Dell. The idea is that people could invest in DVMT and that it tracks the movement of VMW.

My question: Is there any guarantee that the tracking stock (DVMT in this case) will track the price of VMW, besides Dell's good word? With a normal stock, you have dividends and voting rights, so if management goes insane, you can fire them and extract whatever value is left in the company. What happens if management goes insane with a tracking stock? e.g. VMW goes up and Dell refuses to sell DVMT stock for the corresponding price?

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VMW goes up and Dell refuses to sell DVMT stock for the corresponding price?

Once a "tracking stock" is created; Dell doesn't control the price. It is determined by market. So once created, Dell doesn't have much say on the price.

Is there any guarantee that the tracking stock (DVMT in this case) will track the price of VMW, besides Dell's good word?

The guarantee is similar to other stocks. Dell or any other corporation will need to show separately the books for the "Tracking Stock". Technically it is the same as a separate company without the overhead of a legal entity. i.e. everything is kept segregated and dealing with other division are generally accepted cost models. So Dell can't show more debt on a "Tracking Stock" and shore up all profits outside of the division ... ofcourse Dell can still engage in some kind of frauds [similar to Enron, worldcom, etc] or fudge some entries to be advantageous to parent company. However in general the books are segregated and well maintained.

Incase of VMWare, its a separate entity on its own and Dell just holds defined number of shares, so it is relatively very easy to create and manage the "tracking stock"

There is a standard process of creating "Tracking shares" and extinguishing it. It follows the standard valuation process with disclosures to regulators [SEC, etc]. In case of Dell there is a move buy back the tracking share and extinguish them.

  • "Dell or any other corporation will need to show separately the books for the "Tracking Stock"" ... "the books are segregated and well maintained" How does any of this matter to the stock price if the tracking stock doesn't pay dividends or have voting rights? If VMWare's profits suddenly shoot to the moon, how do DVMT owners benefit? – Ram Rachum Jul 3 '18 at 9:35
  • @RamRachum Tracking Stock does pay dividend. There is no voting rights. If the price goes up; the Tracking Stock prices goes up ... this is similar to a companies profit going up; how does it matter to shareholder ... they either get great dividends or the stock price appreciates. – Dheer Jul 3 '18 at 10:35
  • So if vmw pays dividends, dvmt is obligated to pay corresponding dividends immediately? – Ram Rachum Jul 3 '18 at 12:03
  • @RamRachum It is accrued to the Tracking share. They may pay immediately or invest in other ventures that is more profitable to trading share division.So no they are not obliged to pay immediately. If they don't pay the trading share will appreciate in price to factor the same – Dheer Jul 3 '18 at 15:40
  • Sounds odd to me. Sounds like there is no mechanism for the shareholders to force getting value out of the stock. I don't understand how you could build a security over something like this. – Ram Rachum Jul 3 '18 at 16:05

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