On March 31, Google will become part of the Standard and Poor’s 500 index of US-based companies, a move that had been anticipated ever since the company’s IPO took place.
Investors holding the GOOG in their portfolios picked up some good news after the markets closed yesterday. Standard and Poor’s has decided to add Google to its index; Google replaces Burlington Resources which is in the process of being acquired by ConocoPhillips, the Wall Street Journal reported.
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.
Standard and Poor’s explained in the WSJ report why it finally decided to add Google to its heavily-followed index:
S&P Index Committee Chairman David Blitzer said a big reason why S&P didn’t 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 doesn’t 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.
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.
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 today’s trading.
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David Utter is a staff writer for Murdok covering technology and business.
