Opinion: Shares of Ford and GM could rise if they create a special ‘Class EV’ stock for their electric vehicle business

The large difference in multiples probably reflects investors’ longstanding preference for purely play businesses over more diversified businesses. Pure plays are easier to understand, provide better visibility into the business, and can also attract higher growth and investment based on expectations. We can surmise one thing: investors interested in electric vehicles are likely to be different from investors who want to invest in traditional car companies.

Ford and GM may simply tap into those businesses, but there are almost certainly valuable benefits to these automakers in continuing to create EVs alongside traditional vehicles. . But that doesn’t mean these giants can’t create a little more visibility – and pricing – for their electric vehicle businesses. Answer: stock tracking.

GM actually pioneered that when it invented stock tracking in 1984 to solve a problem for H. Ross Perot, the colorful Texan billionaire. GM acquired Perot’s company, Electronic Data Systems (EDS). He and many of his employee-shareholders were concerned that EDS’s performance would be lost within GM’s reach.

They wanted to make sure that EDS’s superior performance was rewarded regardless of how the rest of GM performed, including due to the relative timing of each company. Solution: the EDS team accepts shares of GM, but performance is tied to the economics and associated timing of EDS, dubbed “Class E” shares.

The invention was so effective that GM copied it the year after it acquired the Hughes Aircraft Company – using the currency dubbed “Class H” GM stock. Both of these trackers remained in place for more than a decade until GM split the units apart, distributing all GM stock in them to GM shareholders to form free companies. GM’s track archive worked great for all because of the concern that the model had been copied over and over again.

For example, in 1991-92, U.S. Steel Corporation enjoyed synergy through joint control of subsidiaries as diverse as the Delhi Corporation and Marathon Oil, which shared processing plants. gas and together enjoy lower borrowing costs than if they were independent. But businesses that have different economics for a stock to track will both retain the advantage of joint control and increase visibility into the tracked business with benefits for stock owners as well as managers. This solution worked for a decade until USX split from Marathon Oil.

In 1995, after the government broke up AT&T
NS,
+ 3.69%,
US West is a regional telephone company that also owns cable and mobile properties. Long-term investors attracted to the stability of phone gadgets are attracted to the volatility of media assets; Short-term investors seeking rapid growth have conflicting tastes.

Followers satisfy each person’s needs while placing all activities under common control, harvesting the synergies involved. To further satisfy investor tastes, the utility paid regular dividends as the media side reinvested earnings. The best part is that the arrangement can be untethered as circumstances change. Indeed, in 1998, after synergies became elusive, US West broke away from the media business.

In the mid-1990s, prominent investor and telecom magnate John Malone used trackers to segment the economics of the diverse media properties he had acquired over the decades through TeleCommunications Inc. (TCI). In addition to other advantages ranging from antitrust to tax, Malone realized, for example, that cable assets with programming are better combined than isolated from an operational perspective. However, they have different economic attributes. The use of stock tracking for such businesses can translate into higher price-earnings multiples, which can be valuable when using shares to acquire other companies.

On the downside, as the famous investor Bill Ruane once lamented: on Wall Street, the process goes from innovation, imitation to absurdity. The same goes for trackers, as they flourished in the technology sector in the late 1990s. A common theme has been for a traditional company to offer trackers within a company. subsidiary on the internet – which critics complain helped rekindle the irrational exuberance that fueled the bubble.

Debate over trackers followed, with some seeing them as mere financial engineering that did nothing to increase fundamental value. The champions argue that they are a real financial achievement that adds value by skillfully combining assets to meet the different needs of investors while maintaining economic efficiency.

The truth is more mixed: some trackers are just technical and some are real achievements. The issue becomes whether there is a compelling reason for a particular tracker. Both Ford and GM seem to have compelling reasons to offer tracking stock to their e-vehicle businesses. Surely they would be easy to name: “Class EV” stocks.

Lawrence A. Cunningham is a professor at George Washington University, the founder of Quality shareholder groupand publisher, since 1997, of “Essays by Warren Buffett: Lessons for American Business. For an update on Cunningham’s research on quality shareholders, Register here.

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