JP Morgan‘s Internet analyst Doug Anmuth late Friday offered up some further thoughts regarding Google‘s (GOOG) proposed stock split via a stock dividend, announced last Thursday, and specifically how it will play out in terms of inclusion in the major stock indices.
According to JP Morgan’s “Delta One Strategist,” Min Moon, Standard & Poor’s will probably follow its standard practice of using only one of the shares as the “representing class” for indexing purposes. Other indices, such as the Russell, and the Nasdaq 100, will likely follow suit. If all of these indexes do so, then it’s likely, thinks Moon, that fund managers will sell shares of the new Class “C” stock created through the split in order to buy shares of the Class A:
Following the split off, we expect S&P to continue to use one share class of GOOG in the index. If GOOG (Class A) remains as the representing class and S&P doubles the shares outstanding of GOOG following the split off, S&P 500 indexers will have to swap the Class C shares that they will receive from the distribution with Class A. We are estimating this will generate 30 million shares of supply for Class C and 30 million shares of demand for Class A (post split off). [...] Russell Class A will remain the primary trading vehicle for Russell indices after the split off [...] They will have to sell ~7 million Class C shares and buy ~7 million Class A shares (post split) in order to track the performance of index properly [...] Even if GOOG splits off the shares today, Class C would not have 100 day trading volume as of May 31 (when Russell reviews) [...] GOOG is a member of Nasdaq 100. According to Nasdaq, generally a security in the index is not changed with another share class until the Annual Review in December. If GOOG Class A remains in the index and Nasdaq increases the shares of GOOG in the index, we estimate 4.4 million shares of Class C will be sold and 4.4 million shares of Class A (post split) will be bought.
The end result of all this, suggests Moon, is that investors may sell 41 million shares of Class C to buy the Class A shares.
A further question on that, which I raised in my column in Barron’s print magazine this weekend, is whether the new Class C shares might trade at a discount to the Class A, even though they’re supposed to be equal, because of this matter of index inclusion/exclusion.