REDMOND, Wash. -- Institutional investors want Microsoft to create a "tracking" stock that would reflect only its Internet business.
A Microsoft Corp. spokesman denied rumors the company plans to create such a stock, but investors say it's an attractive idea because of the potential to boost one of Wall Street's already most highly valued stocks.
Known for its software savvy, Microsoft Corp. officials are said to be considering a separate stock that would account for the company's Internet holdings, which could increase in value as the demand for Internet-related stocks continues.
"You would want to be an owner of Microsoft stock before this happens," said William Epifanio, vice president and enterprise software analyst at J.P. Morgan Investment Management Inc., New York. According to CDA/Spectrum in Rockville, Md., J.P. Morgan owned 15,872 shares of Microsoft as of Dec. 31.
"It would give you an opportunity to own separately the Internet part of Microsoft . . . potentially it could increase the value of the combined companies," said Eric Gerster, a software analyst with T. Rowe Price Associates Inc. At year end, T. Rowe Price owned 5,428 shares, according to CDA/Spectrum.
But if such stock were issued, current shareholders would likely be offered a certain number of tracking shares in addition to their Microsoft shares, according to Mr. Epifanio.
The price of Microsoft stock would be expected to diminish at first if the tracking stock were established, so the valuation of the combined shares equals the valuation of the original, single Microsoft stock. Speculation continues on what the valuation of a Microsoft tracking stock would be initially.
Mr. Epifanio believes a tracking stock would be a positive for shareholders and for Microsoft, in terms of valuation.
Other analysts were not sure how the stock price would be affected. For some, it's a question of timing and how long the Internet stock craze is going to last.
Andrew Brosseau, managing director of the software research practice at Boston-based S.G. Cowen & Co., said it's hard to know whether Microsoft shareholders are paying for the company's Internet holdings, but with the hype surrounding Internet stocks, it's also hard to say what might happen to a tracking stock's price. Internet properties are not generating much revenue for Microsoft, as is the case with many Internet companies, he said.
One analyst said the Internet accounts for less than 5% of Microsoft's business.
"If they separate, it probably gives them a better ability to be valued relative to Internet peers . . . Whether that trades up or down, I don't know," said Tom Hensel, equity analyst for Chicago-based Everen Securities Inc.
"The reality is they (Microsoft Internet revenues) are very small numbers compared to Microsoft, but large compared to other Internet stocks," said T. Rowe Price's Mr. Gerster.
Tracking stocks are not new; General Motors Corp. and AT&T Corp. have issued tracking stocks related to businesses separate from their core businesses.
In the technology sector, however, the strategy is relatively rare.
A tracking stock generally is used by companies that want shareholders to recognize the value of a certain business that is tied up within the structure of the company's core business. In some cases it might be divisions within the company and other times it may be separate acquisitions.
Tracking stocks may eventually lead to spinoffs of the side business. For companies it's a good way to keep the balance sheets separate, but still maintain control of the division.
Tracking stocks ultimately can be held separately from the regular company stock, but initially may be offered to current shareholders alongside existing company stock (i.e. so many shares of Microsoft may translate into a certain number of shares of the tracking stock).
In Microsoft's case, a tracking stock might be an opportunistic way for the company to fund future acquisitions and deals, bringing in more customers. "It would be a high-value currency and will allow for acquisitions," said William R. Keithler, portfolio manager of the INVESCO Technology Fund. The fund owned 2% of Microsoft's net assets, as of March 31. The INVESCO Funds Group Inc. owned 1,567 shares as of Dec. 31, according to CDA/Spectrum.
Although Microsoft has not been strapped for cash, it still could use the tracking stock to avoid both a direct hit to the balance sheet and the dilution of shares.
Mr. Gerster, meanwhile, wonders whether a Microsoft tracking stock would be focused just on the Internet or if it would be broader, including its cable and telecom businesses.
The browser capabilities, part of the Windows NT system, probably would remain with the Microsoft general stock holdings, Mr. Gerster said. However, if the tracking stock included broader media holdings, Microsoft could include its foreign cable and telecom acquisitions, AT&T Corp., Nextel Communications Inc., Comcast Corp. and Road Runner holdings, he said.
Andrew Roskill, an enterprise software analyst at New York-based Warburg Dillon Read LLC, is not a big fan of tracking stocks. Instead, he suggested spinning off Microsoft's cable and Internet holdings. The cable, he said, is a good investment and a spinoff would promote the further development of broadband Internet capabilities.
