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As these examples illustrate, the right to vote is often a distinguishing characteristic between different classes of stock. Suppose two classes of stock differ in but one respect: One class has voting rights but the other does not. As you would expect, the stock with voting rights would be more valuable. In the United States, which has a legal system with fairly strong protection for minority stockholders (that is, noncontrolling stockholders), voting stock typically sells at a price 4 to 6 percent above that of otherwise similar nonvoting stock. Thus, if a stock with no voting rights sold for $50, then one with voting rights would probably sell for $52 to $53. In those countries with legal systems that provide less protection for minority stockholders, the right to vote is far more valuable. For example, voting stock on average sells for 45 percent more than nonvoting stock in Israel, and for 82 percent more in Italy.

As we noted above, General Motors created its Class H common stock as a part of its acquisition of Hughes Aircraft. This type of stock, with dividends tied to a particular part of a company, is called tracking stock. It also is called target stock. Although GM used its tracking stock in an acquisition, other companies are attempting to use such stock to increase shareholder value. For example, in 1995 US West had several business areas with very different growth prospects, ranging from slowgrowth local telephone services to high-growth cellular, cable television, and directory services. US West felt that investors were unable to correctly value its highgrowth lines of business, since cash flows from slow-growth and high-growth businesses were mingled. To separate the cash flows and to allow separate valuations, the company issued tracking stocks. Other companies in the telephone industry, such as Sprint, have also issued tracking stock. Similarly, Georgia-Pacific Corp. issued tracking stock for its timber business, and USX Corp. has tracking stocks for its oil, natural gas, and steel divisions. Despite this trend, many analysts are skeptical as to whether tracking stock increases a company’s total market value. Companies still report consolidated financial statements for the entire company, and they have considerable leeway in allocating costs and reporting the financial results for the various divisions, even those with tracking stock. Thus, a tracking stock is not the same as the stock of an independent, stand-alone company.

Taken From : Five-Minute MBA – Corporate Finance

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