McDATA may well become part of the S & P 500, because McDATA's current market value of about $2.4 billion [81 million MCDTA and 29.38 million MCDT outstanding shares sec.gov at $20.53 and $25.99 respective 4-27-01 closing prices] is substantially higher than the market value of the smallest market value S & P 500 stock (National Service Industries (ticker: NSI) at $992 million at 12-31-00).
When McDATA becomes part of the S & P 500, this will cause a price jump in MCDTA but not in MCDT. This is because S & P allows only one class of a company's stock to be in the S & P 500. [One of Raytheon's reasons for combining its A and B shares: "Only RTNB (with more votes and shares) is part of the S&P 500 Index, although Raytheon's weighting in the index is based on the combined market cap of RTNA and RTNB. S&P will only include one class of a company's stock in any index."
investor.raytheon.com ]
MCDTA has about 73% of the combined outstanding MCDTA and MCDT shares, together with 97% of the votes, so S & P will pick MCDTA rather than MCDT to be in the S & P 500.
When EMC spun off MCDTA on Feb. 7, 2001, S & P 500 index funds scrambled to unload their MCDTA because it wasn't in the S & P 500. This helped drive down the price of MCDTA relative to MCDT, a situation that continues to this day. When MCDTA becomes part of the S & P 500, the opposite will occur, and MCDTA will rise relative to MCDT.
There will be no short squeeze price jump effect from MCDT's large short position, because new MCDT/A arb short sellers will replace squeezed short sellers as long as there is a meaningful (now more than $5) spread between MCDT and MCDTA. It is now practically impossible to get MCDT shares to short, because of all the MCDT/A arbs ready to short MCDT the moment more shares become available.
On Nov. 1, 2002 (first day of not jeopardizing taxfree spinoff of MCDTA from EMC, per McDATA Investor Relations dept., accessible at www.mcdata.com), MCDTA and MCDT may be combined into one class of stock, similar to Raytheon RTN.A, RTN.B (above) and Waddell & Reed WDR, WDR.B. A combination is likely to occur if MCDTA continues to sell for more than MCDT. If MCDTA happens to sell for more than MCDT, MCDTA stockholders, with 97% of the vote (MCDT has the other 3%), probably will choose not to combine the shares.
So thoughtful investors may choose to sell their MCDT and buy MCDTA, or invest in MCDTA rather than MCDT. At an assumed $5 per share differential between MCDTA and MCDT (after commissions), this will result in a profit of $500 per 100 shares, or $5000 per 1000 shares. |
