Making room for Google in S
New York, Mar 25: Adding Google Inc. to the Standard&Poor's 500 index means more than a quick boost to the Internet high flyer's stock as index fund managers rush in to buy some 19 million shares.
It also means about $7 billion of other stocks will need to be sold to make room for the Web search provider, analysts said on Friday.
Standard&Poor's said late on Thursday that effective with the close of trading on March 31, Google will replace Burlington Resources Inc. in the benchmark index.
''I think it is appropriate that Google is being added, given their impact to the economy,'' said Amy Schioldager, managing director and head of the U.S. indexing business for Barclays Global Investors.
While Google shares soared nearly $24, or 7 per cent, in response to the news, some experts sounded a note of caution.
''This ultimately hurts the return on the S&P 500 going forward,'' said Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania.
That is because managers of index funds will buy the stock at what could be a temporarily inflated price while selling shares of other components, likely driving them lower.
A Standard&Poor's official said more than $1.1 trillion is invested in S&P 500 stocks through index funds, exchange-traded-funds and other vehicles.
Schioldager noted that Google's market capitalisation, or share price times shares outstanding, is more than $100 billion, making it the largest company added since Yahoo Inc.
Because Standard&Poor's last year shifted to a system of weighting stocks in the index on the basis of ''public float,'' or stocks available for trading, about 68 per cent of Google's total outstanding shares will be used in the index calculation, Credit Suisse analyst Phil Mackintosh said in a research note.
That would mean Google would account for 0.63 per cent of the index.
Mackintosh estimated that about $6.8 billion, or 18.8 million shares, of Google stock will have to be bought by indexers.
As Schioldager said, a similar amount of other stocks will have to be sold to make room for Google in the index.
Siegel said Google represents a much better value compared with where Yahoo and other stocks were trading when they were added to the S&P in the 1990s. The Google share price to projected earnings works out to a ratio of about 39.
But Siegel says his research shows investors who bought the original S&P 500 stocks nearly 50 years ago would have done better just buying and holding those stocks and ignoring the approximately 1,000 companies that were added as substitutions over the years.
Burlington Resources is being removed from the index because of its acquisition by ConocoPhillips, a transaction that is expected to be completed around the end of next week.