Summary  631
As we write this, no major U.S. or European company has tracking stock 
outstanding, underlining the point that this form of ownership restructuring 
fails to bring the benefits executives are looking for.
Summary
As businesses develop through their life cycles, they pose new challenges to 
the parent company. Parent companies therefore should continually reevalu-
ate which businesses to keep and which to divest. However, most corpora-
tions divest businesses only after resisting shareholder pressure. In delaying, 
they risk forgoing potentially significant value.
Senior executives should prepare the organization for this cultural shift to 
a more active approach. They should deliver the message that their new ap-
proach will entail divesting good businesses, and such divestitures should not 
be considered failures. Because managers may find it difficult to divest good 
businesses, corporations should build forcing mechanisms into their divesti-
ture programs.
There is no guarantee that divestitures will create value. The best divesti-
tures indeed outperform the market, but those at the bottom fall even further 
behind. To increase the chances of a successful divestiture, executives should 
thoroughly identify the implications for the economics of the remaining busi-
nesses and consider these implications when structuring the divestiture agree-
ment. Executives should also take care not to underestimate the time and effort 
required to complete a divestiture.

633
33
Capital Structure, 
Dividends, and Share 
Repurchases
Shaping a modern corporation’s financial profile might appear to be an infi-
nitely complex task. But in practice, it typically boils down to just three deci-
sions: how much to invest, how much debt to carry, and how much cash to 
return to shareholders. In this book, we devote most of our attention to explor-
ing the first of these topics, but the others are also important. It’s not so much 
that making the right decisions about capital structure will create a great deal 
of value; it’s that making the wrong calls can destroy tremendous amounts of 
it. For example, during the high-tech bubble of the late 1990s, many European 
telecommunication companies accumulated unprecedented levels of debt on 
their balance sheets to fund investments in digital mobile networks, expecting to 
issue equity at a later stage to repay the borrowing. But before they could, 
the bursting of the high-tech bubble in 2000 drove down the earnings outlook 
for mobile services and the share prices for telecom players. Providers had 
to recapitalize their balance sheets at great pain and cost, losing billions of 
shareholder value.
The primary objective of a company’s decisions to structure its capital, 
pay dividends, and repurchase shares should be to ensure that the company 
has enough capital to pursue its strategic objectives and to weather any cash 
shortfalls along the way. If a company doesn’t have enough capital, it will 
either pass up opportunities or, worse, fall into financial distress or even bank-
ruptcy. When a company holds too much capital, the remedy is much easier: 
it can always increase its cash distributions to shareholders.
This chapter explores the options managers have for choosing an appro-
priate capital structure for their company and how they should develop a 
supporting policy for returning cash to shareholders or raising new capital. 
In the first two sections, we discuss some practical guidelines and a four-step