Is membership of the FTSE-100 really that important?
Joining the FTSE-100 guarantees sky-high levels of interest
Membership of the FTSE-100 confers instant blue-chip status on those listed companies large enough to make the grade. One would think that those companies just outside the index of the UK's largest companies by market capitalisation would stop at nothing get into the premier league of the UK stock market. Not always, it seems.
British Land, the property company, joined the FTSE-100 in March after a rights issue which raised £220 million. How important was FTSE-100 membership to the company? Not very, claims finance director John Weston Smith. 'I don't think you could say we suddenly emerged into the sunlight as a consequence of joining the FTSE-100,' he says. British Land, he asserts, has been a name in the property business for some time, irrespective of its capitalisation. 'This doesn't change anything. It's an incidental staging post.' Another company, which doesn't want to be named, is struggling towards the bottom end of the FTSE-100 but claims not to be unduly bothered by the prospect of relegation. 'There is a flutter of interest when you go in, but in the long run we don't think it affects the valuation of the company,' says its chairman. 'Its importance is overrated.' Nigel Stapleton, chairman of Reed International, the publishing and information services company, disagrees. As former chairman of The 100 Group, the club for finance directors of FTSE-100 companies, he sat on the committee which decides FTSE membership. FTSE-100 status is important to your investor base, he argues. 'Between 15% and 20% of UK investments are index-linked. The impact on your share price of moving in and out can be considerable,' he points out. Stapleton similarly uses a football analogy to make his point. 'Leaving the Footsie is much more important than going out of football's premier league and into the first division. If relegated, you might get as many spectators at a first division match - but leave the FTSE-100 and certain people wouldn't come to the football match. That is the major issue.' Charles Richardson, director of corporate affairs at venture capitalists 3i, agrees. 'It's very valuable to be in the FTSE-100,' he says. 'Being one of the UK's largest capitalised businesses has a certain prestige to it. The only downside is that you get every begging letter going.' 3i was listed in 1994 and went straight into the FTSE-100. 'It did help to put 3i on the map, both in the UK and internationally.
We came from nowhere as an unlisted company. It certainly raised our status and the general awareness of us.'
Keith Butler-Wheelhouse, chief executive of Smiths Industries, the avionics and engineering group, says that entry into the FTSE-100 marks a 'scorecard of value' for shareholders with the result that investor interest is sharply higher. Since the company joined the FTSE-100 in December 1995, Butler-Wheelhouse and his financial director, Alan Thomson, have done presentations in Scandinavia, Italy, Switzerland, Germany and the US. 'You're under the microscope the moment you're in there,' he says. Such pressures are a mixed blessing as far as Thomson is concerned. 'It's worth being in the FTSE-100, but not at any cost,' he says.
Membership of FTSE-100 does sometimes inhibit certain types of business activity. Some companies have to make special arrangements whenever they sign up for cross-border mergers, suggests Stapleton. In 1993, the issue impacted on his company, through its effect upon the structure of Reed and Elsevier. The two merged but they decided to maintain separate stock market listings. 'Our compelling reason for choosing two companies is that the Reed International investor base would have been upset if we had made it a Dutch company and taken it outside the FTSE-100,' says Stapleton.
With the increasing globalisation of the markets, real-time, 24-hour international stock markets may make FTSE-100 membership much less important. Until then, it will retain its special status, although as Thomson suggests, it's not worth being in at any cost.