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Index funds feeling lucky?
Google is probably going to be added to the S&P 500 at some point in the next year.
August 31, 2004: 12:18 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - You may have stayed away from Google's initial public offering.

But if you're like many investors, you probably own an S&P 500 index fund. And that means you'll probably have to start caring about Google's fundamentals and valuation in the not-so-distant future.

There were some vague rumblings on the day of Google's IPO about it quickly being added to the benchmark index. That was just idle chatter however. And as I'm about to explain, there are a couple of reasons why Google probably won't be added before the end of this year.

But mark my words, Google (GOOG: Research, Estimates) will most likely be added to the S&P 500 at some point in 2005.

According to the Standard & Poor's Web site, here are the main criteria for addition or deletion to the S&P 500 index:

It must be a U.S. company with a market capitalization of at least $4 billion.

Done. The No .1 search engine firm has a market value of about $28 billion. As a matter of fact, Google's market value is greater than 420 of the companies in the S&P 500.

It needs to demonstrate financial viability, which Standard & Poor's defines as usually being 4 consecutive quarters of positive reported earnings.

Google has already accomplished that. David Blitzer, managing director and chairman of the index committee for Standard & Poor's, said, however, that the committee usually prefers to wait about 12 months before considering adding shares of newly public companies to the index.

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But Standard & Poor's has made exceptions to this rule before. Palm, for example, was added to the S&P 500 in July 2000, just four months after being spun-off from 3Com. (Palm is no longer in the index.)

Insurer MetLife went public in June 2000 and was added to the S&P 500 in December of that year. And insurers Principal Financial Group, Prudential Financial and Anthem, which all went public in December 2001, were all added to the index in July 2002.

Even if the S&P index committee members wait for Google to report four consecutive quarters of earnings as a public company, it wouldn't represent a major stumbling block. It's hard to believe that Google will wind up stumbling into the red anytime soon.

There needs to be adequate liquidity and a reasonable price, i.e., the ratio of the annual dollar amount traded to market value should be at least 0.3.

So in Google's case, approximately $8.4 billion of stock should trade a year. About $6.7 billion worth of the company's shares have changed hands in their first 8 days of trading, so that shouldn't be a problem.

The public float must be at least 50 percent of the stock.

Tech Biz
S&P 500
By Paul R. La Monica

This is the main issue preventing Google from being considered right now, Blitzer said. Google only sold about 20 million of its 271.2 million shares in the IPO. So more shares need to be available to the average investor before Google could be added to the index.

But as my colleague Eric Hellweg pointed out in a column Monday, that probably won't be a concern for much longer. A large number of shares are likely to hit the markets during the next six months, as various lock-up periods for insiders expire.

A company must also be an operating company (as opposed to a closed-end fund, holding company or investment vehicle).

No problem there obviously. Google isn't a mini-Berkshire Hathaway, despite the co-founders' apparent fascination with Warren Buffett.

And finally, Standard & Poor's said that when considering additions to its major indexes, it is looking to help maintain an appropriate sector balance.

Relevant as Google?
These 7 S&P 500 techs have much smaller market values and are expected to post lower sales figures than Google.
CompanyMarket valueEst. 2005 sales
Applied Micro Circuits$1.1 billion$300 million
Ciena$999 million$369 million
PMC-Sierra$1.7 billion$433 million
QLogic$2.4 billion$545 million
Citrix Systems$2.7 billion$690 million
Mercury Interactive$3.2 billion$780 million
JDS Uniphase$4.4 billion$811 million
* as of 8/30/04

Given the changes in tech over the past few years, Google would seem to be a far more relevant gauge of the sector's health than a host of much-smaller firms still in the index.

Google's expected 2005 sales of $2.4 billion are higher than sales forecast for 92 companies in the benchmark index, including several formerly hot tech firms. (See the chart to the right)

Even Blitzer admitted that the S&P is keeping a close eye on Google. "We're interested in the company like everybody else is," Blitzer said.

So once the available float crosses that 50 percent threshold, don't be surprised if Google gets named to the index shortly thereafter.

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