Hey, ya guys made the NYTimes. Making the List and Making a Killing, Too
July 15, 1999
MARKET PLACE
By EDWARD WYATT
or years, the addition of a company to the Standard & Poor's
500-stock index has created an almost-riskless opportunity for
speculators to profit.
Knowing that hundreds of investment managers will need to buy millions
of shares of a certain stock on a certain day to keep their indexed
portfolios aligned with the benchmark S.& P. 500, speculators follow a
simple plan: buy a company's shares after Standard & Poor's announces
they will be added and sell them to index-fund managers a few days later
when the stock officially joins the index. Even the hint that a company
might be selected for the index sometimes sends its shares soaring, at
least temporarily.
While speculators have profited from these stock run-ups, though, little if
any tangible benefit has flowed to the companies themselves -- until now.
This week, a few days after Standard & Poor's announced that
Qualcomm Inc. would be added to the esteemed list of 500
big-capitalization stocks, Qualcomm said it would sell up to 4.6 million
shares directly to index fund managers. The offering is expected to raise
more than $600 million for Qualcomm's coffers -- money that otherwise
would have been left on the table.
While Qualcomm is benefiting from the idea, however, some small
shareholders are upset that they might lose the quick gain. They had
come to view their company's addition to the S.& P. 500, and the price
increase that comes with it, as a reward for having stuck with a company
since it was a small-cap stock.
Over the last year, several other companies have registered stock for sale
to index fund managers, but Qualcomm, a wireless communications
company based in San Diego, appears to be the first to reap all of the
proceeds itself. Other companies that have employed a similar strategy --
including Safeway, Electronic Data Systems and Carnival, the cruise
line company -- used the offering at least in part to allow big shareholders
to cash out.
In Qualcomm's case, some big investors love the idea -- even if it means
less of a short-term pop in the stock price. "It's an efficient and quick
way to raise capital," said Jim Hillary, a senior analyst and portfolio
manager at Marsico Funds, which owns Qualcomm shares. "It requires
little management involvement and no roadshows. I'm very happy that
management will be spending its time running the business rather than
marketing itself."
Index fund managers, too, like the idea. "It should help take the volatility
out of the stocks," said George U. Sauter, who oversees index funds at
the Vanguard Group, the largest seller of index funds to individual
investors. "I don't know why more companies don't take advantage of it."
The fevered interest in what companies might be added to the S.& P.
500 has grown stronger the last decade, as indexing has grown in
popularity as an investment strategy. Standard & Poor's, a unit of
McGraw-Hill, estimates that index funds with roughly $700 billion in
assets align their portfolios to match the performance of its big index.
Two years ago, just $500 billion was linked to the index.
Consider the effect of being added to the S.& P. 500 on a company like
Qualcomm, which has a market value of about $22.5 billion. That is
equivalent to about two-tenths of 1 percent of the total value of the
companies in the 500 index, which at June 30 was $11.2 trillion.
For index funds with $700 billion in assets to devote two-tenths of 1
percent of their value to Qualcomm, they would have to buy $1.4 billion
worth of the company's stock -- or about 9.3 million shares. That is
about 6 percent of Qualcomm's total shares, or better than three days
worth of recent trading volume.
That demand certainly creates an opportunity for speculators to profit.
Thus, on Friday, the day after Qualcomm was named to the index to
replace Transamerica, which is being acquired by the Dutch insurance
company Aegon, Qualcomm's shares gained 4.5 percent, to close at
$148.75. On Tuesday, after Qualcomm announced that it would sell
shares directly to index funds, its stock price fell more than $3, to
$144.375. Yesterday, the shares closed at $149.5625.
Executives at Qualcomm declined to comment on their decision because
the company's stock offering is now in registration at the Securities and
Exchange Commission.
The offering mirrors one from Carnival, which in December sold 17
million shares to index fund managers, raising $730 million. Carnival also
allowed a major shareholder, Arison Foundation Inc., to sell two million
shares.
Last November, Kohlberg Kravis Roberts & Company, the leveraged
buyout firm, sold 17 million of its shares of Safeway just after the
company was chosen for the index. Last August, a General Motors
employee pension plan similarly sold $475 million worth of its E.D.S.
stock. And in June 1998, an offering of stock by managing directors of
Bear, Stearns & Company followed closely the announcement of the
company's addition to the index. None of the proceeds of those
offerings, however, went to the companies.
Qualcomm, by keeping the proceeds, hopes to strengthen the company
without alienating individual investors. Many individuals who frequent the
Silicon Investor message board (www.techstocks.com) have complained
about losing the short-term gains that usually come with an addition to the
index.
Qualcomm's precedent could even be a threat to the business of some
investors who closely follow the popular stock indexes. "You could argue
that they are taking away from the return due to existing shareholders,"
said Leo Guzman, whose Miami-based brokerage firm, Guzman &
Company, has made a specialty of trading stocks that are added to or
deleted from popular indexes.
And some message-board participants have questioned whether issuing
additional shares was a requirement of being added to the index.
Absolutely not, said William Jordan, a spokesman for Standard &
Poor's. "Qualcomm would not have been added to the index if we did
not feel that there was an adequate amount of freely traded stock in
public hands," Jordan said. "There are no conditions on companies to be
added to the index because we don't consult the companies prior to their
addition."
Copyright 1999 The New York Times Company |
