(December 12) – “The American infatuation with the new is well known and mined on Wall Street,” writes Gretchen Morgenson in today’s New York Times.

“Fertile minds at the nation’s brokerage firms have for years made a lucrative trade of creating newfangled securities in the hope that they will appeal to investors looking for fresh and exciting places to put their funds.”

“Few of these inventions, however, have grown as popular in recent years as the tracking stock, which mirrors the performance of a specific part of a company’s business but does not give its shareholders any ownership in the assets of that business.”

“Tracking stocks have been issued by companies as big as AT&T and General Motors and for smaller concerns like Ziff- Davis and Alcatel Optronics. So far this year, new tracking stocks have accounted for 12.5 percent of the $79.5 billion raised in initial public offerings. In all of 1999, only 0.7 percent of the $69 billion raised in I.P.O.’s consisted of tracking shares.”

“Tracking stocks are popular with both companies and investors because they seem to increase shareholder value by letting the market judge the worth of a fast-growing part of a company independent of its slower-growing lines of business. With investors willing to pay more for this growth, companies can raise capital more cheaply and have a pricier stock with which to buy other companies.”

“As with many inventions or creations, the pitfalls emerge only gradually. University of Iowa academics found that tracking stocks do not perform as well as shares of other companies in the same industry. And tracking stocks can pose other risks for investors and for the parent companies, as shareholders in the biotechnology company Genzyme are discovering this week.”

“Genzyme shareholders are mulling over the creation of a new tracking stock that would result from an acquisition proposed by management. Two of the Genzyme Corporation’s units covered by tracking stocks would buy the company, Biomatrix, using money borrowed by the parent Genzyme. While the purchase could increase the market prices of the tracking stocks, which are to be combined, the liability for the loan would ultimately fall on the parent company, leaving it to shoulder most of the risk yet receive little of the benefit.”

“B. Kenneth West, senior consultant for corporate governance at TIAA/ CREF and a director at Motorola, questions whether investors holding tracking stocks really understand what they own. ‘I’ll bet the shareholders in these things don’t know if they’re on foot or horseback,’ he said. ‘But the main drawback in tracking stocks is that they create significant potential conflicts of interest among stockholders, the board of directors and management.’