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Tracking stock gives Dell financing to buy EMC

Unusual arrangement lets company offer value without ceding control

The last time anybody was talking about tracking stocks, Y2K was a threat, the music-sharing service Napster was rattling the recording industry, and the first tech boom was in full swing.

More than 15 years later, the term reemerged this week with the announcement that Dell Inc. would buy EMC Corp. of Hopkinton for $67 billion, with a quarter of that financing coming through a tracking stock.

Under terms of the deal, Dell would create a tracking stock for VMware Inc., a publicly traded software company of which EMC owns 80 percent. EMC shareholders would get cash and tracking stock tied to VMware’s share price, which closed at $69.34 a share on Tuesday, down 4 percent.

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Dell has not provided details on how it will structure the tracking stock.

In an interview on CNBC, Dell’s chief executive, Michael Dell, and his counterpart at EMC, Joseph Tucci, said they expect the tracking stock to closely follow the performance of the conventional stock.

“This is a very unique deal,” said Matthew T. Billett, a finance professor at Indiana University who cowrote a paper on tracking stocks more than a decade ago. “It’s an outdated practice.”

Tracking stock is a way for companies to attract investors without giving them ownership stakes, as is done with conventional stocks. In Dell’s case, it was a way to finance the takeover without borrowing more money or diminishing its stake in VMware, analysts said.

The value of a tracking stock is tied to the assets it is tracking.

For example, if VMware’s stock price rises, EMC shareholders would see the value of their tracking stock rise; if the price falls, so would the tracking stock’s value.

They can trade tracking stock like conventional stock, but unlike VMware shareholders, the holders of the tracking stock can’t vote on board members, executive pay, and other issues involved in running the company.

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In the 1990s, tracking stocks were frequently used by businesses such as AT&T and Walt Disney Co. to highlight Internet-based divisions whose values, they believed, were not adequately reflected in the companies’ overall share prices. Tracking stocks fell out of favor after the tech bust, not only because their values plummeted, but because the crash highlighted the confusion around the security, Billett said. Investors weren’t sure what exactly they owned or what their legal rights were.

In the Dell-EMC case, the tracking stock may have been necessary to close the deal, he said.

As a privately held company, Dell would have struggled to come up with the money to finance such a large acquisition. The tracking stock allows Dell to keep control of VMware, while also letting EMC shareholders reap higher returns if the company’s price climbs under Dell’s leadership.

Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.