Google will replace oil and gas producer Burlington Resources Inc in the S&P 500 Index, S&P said, sending the internet search leader’s shares up more than 7 per cent.
On March 31, Google will become part of the Standard and Poor’s 500-index of US-based companies, a long-anticipated rite of passage that lifted the online search engine leader’s recently sagging shares.
Google’s entrance into the elite club had been considered a foregone conclusion by many because its market value had already surpassed many of the nation’s best-known companies like General Motors Corp. and Hewlett Packard Co. — both components of the even more exclusive Dow Jones industrial average.
Investors holding the GOOG in their portfolios picked up some good news after the markets closed. Google will replace Burlington Resources Inc. in the closely watched barometer March 31. Burlington Resources, a major oil producer based in Houston, is being acquired by ConocoPhillips Inc. in a deal worth about $35.6 billion, the Wall Street Journal reported.
Standard and Poor’s explained in the WSJ report why it finally decided to add Google to its heavily-followed index:
The inclusion into the S&P 500 provides Google’s stock with an immediate catalyst because so many large mutual funds are based on the index’s composition. Once a stock is added to the index, money managers typically have to buy shares as they readjust their portfolios.
Joining the S&P 500 also is a symbol of prestige that stamps its members as a blue-chip company.
S&P Index Committee Chairman David Blitzer said a big reason why S&P did not add Google to its index late in 2005 is because the stock was surging – setting it up for a big decline. "There were a couple of spots last fall, when [the stock] went straight up, and when something goes straight up it gives one pause because it’ll also go straight down," he said.
Mr. Blitzer said the committee decided to pick Google now partly because the shares seemed more stable. Also, the committee does not expect to see another opportunity to add a company as large as Google for several months. For one thing, most major merger-and-acquisition deals that will close over the next five or six months have already been announced.
"I see more respect for Google because it made it to the big time and rightfully so based on revenues and market capitalization," said Richard Sichel, chief investment officer at Philadelphia Trust Co where he helps oversee US$1.5 billion ($2.43 billion).
Shares of Google, based in Mountain View, California, soared as high as US$475 earlier this year, but fell after the company’s chief financial officer last month said revenue growth was bound to slow.
Shares of Google, which went public in August 2004 at US$85 a share, jumped US$25.31 to US$367.20 in after-hours trading on the Inet network, up from from a Nasdaq close of US$341.89.
Funds are going to have to come in and take positions if they do not have it, based on inclusion in the index, said Peter Cardillo, chief market analyst and chief strategist with SW Bach and Co.
To better understand why this move is important to Google, it helps to understand a little about index funds. Mutual funds that track the S&P 500 index add and remove companies in large blocks of stock so they can best match the overall performance of the S&P 500.
These funds will be purchasing a lot of GOOG when it is added to the index. As an opposite example, when Daimler acquired Chrysler, fund managers dumped Chrysler from their index funds after the S&P removed the company from its index. Since Chrysler became owned by a non-US company, it was no longer eligible for being in the S&P 500.
Google generates more than 97 per cent of its revenue from search-related advertising, and executives want to push beyond Web search advertising into other forms of online and offline advertising including radio, mobile phones, video and print.
Market research firm comScore Networks Inc shows Google with 40 per cent of the US market for Web search, and between a 60 per cent to 80 per cent share of most European markets.
Before the announcement, Google’s market value had dropped by nearly 20 percent so far this year, wiping out about $20 billion in shareholder wealth amid concerns about slowing earnings growth and questions about its often cryptic communications with Wall Street.
Despite its stock’s recent downturn, Google’s market value has remained above $100 billion.
Those investors celebrated in after-hours trading. Shares of Google’s stock soared 9.26% to $373.55, a gain of $31.66 since market close.
So the impact of joining the S&P 500 is pretty significant to a company. Google investors have realized this, and are likely eager to see how much Google moves up in trading.