By Jonathan Weil
The notion that Bank of America Corp. would think about issuing a tracking stock for Merrill Lynch is so wacky, we can only hope the company isn't serious about it. The Wall Street Journal today reported that Bank of America included the tracking-stock idea in a list sent to the Federal Reserve of potential measures the company could take in case its financial situation worsens.
There are a lot of reasons why a desperate company might want to issue a tracking stock. None of them are good. One company that did it in 2000 was WorldCom Inc., less than two years before it collapsed in one of the greatest accounting scandals ever. Here are some excerpts from a March 2003 investigative report by WorldCom's audit committee discussing the company's use of the gimmick. (The Ebbers referred to below is former WorldCom CEO Bernie Ebbers, currently incarcerated.)
"In WorldCom's November 1, 2000, press release, Ebbers said that the trackers enabled 'the respective businesses to achieve greater management and resource focus to execute business strategies that work most effectively for each' and 'create greater shareholder value by providing shareholders with two distinct, clear and compelling investment opportunities . . . .'
"By contrast, notes taken by the general counsel of corporate development, Bruce Borghardt, at a September 2000 board meeting indicate that Ebbers told the board that the tracker was 'financial engineering' and, by putting poorly operating businesses -- the 'dogs and cats' -- into MCI Group, they could show double-digit revenue growth in WorldCom Group. Borghardt’s contemporaneous notes also reflect that one director said that the tracker was the equivalent of 'put[ting] manure in the closet' and that it would 'still smell.' "
"According to its public filings and press releases, the WorldCom Group stock tracked the 'primary growth drivers of the company' based on services provided to corporate enterprise customers; the MCI Group stock tracked 'the company’s high-cash flow' generated primarily by consumer and wholesale long-distance customers. By all accounts, the process of allocating the costs and revenues between the two stocks evolved over time and was highly subjective. WorldCom was not simply divisible into two clearly defined entities with distinct costs.'"
(Jonathan Weil is Bloomberg View columnist)-0- Sep/02/2011 18:55 GMT