Although news bulletins are at pains to explain just how the FTSE
100 is doing, financial PR and investor relations (IR) practitioners are
divided over the influence of the FTSE 100 in a global economy, despite
the apparent resurgence of telecom, media and technology (TMT)
'Old' blue-chip companies such as Hanson, the aeroengine-maker Rolls
Royce and British Steel successor company Corus, last week dropped out
of the FTSE 100 along with Associated British Foods and brewing and
leisure group Scottish and Newcastle. Those coming in were internet
security firm Baltimore Technologies, IT products and services company
Dimension Data, electronic equipment distributor Electrocomponents,
telecoms equipment engineer Spirent and Granada Media.
The FTSE International committee, which compiles the indices, meets
every quarter to adjudicate on the companies joining and leaving the
Its decision is based on ranking companies by market value using the
previous day's closing prices.
As decisions are made on a quarterly basis, companies can move in and
out of the FTSE 100 regularly. Scottish and Newcastle, Hanson and ABF
were ejected in March when the index saw its biggest ever shake-up
following the rise of hi-tech stocks. They were re-admitted in June,
following a downturn in the new economy, triggered by fears of an
interest rate rise and a fall in the Microsoft share price.
Perhaps surprisingly, most financial PROs claim that being in or out of
the FTSE 100 has little effect on a company's reputation as there are so
many factors involved. What is important is the market and - profit
warnings aside - financial PROs aren't claiming they have mastered the
art of controlling share prices.
'A lot depends on how the companies react to falling out - it can be
compared to being relegated from the Premiership. Some companies are
relegated and never heard of again,' says GCI Financial MD Alex Mackey
'Because they are judged purely in terms of share price no amount of
corporate activity will change it,' he says.
'When a company drops out, its fall is often accompanied by a lot of
adverse publicity and in that situation you have to apply 'first aid
PR'. The press will look for a reason why the company has fallen out and
will make an educated guess,' he adds.
'Companies don't have any control over it, as it is just down to share
price. It is a noticeable cosmetic event, but companies can drop out
through no fault of their own. They could be doing very well but then
two companies outside the FTSE 100 could merge and knock them out,' says
William Clutterbuck, a consultant at the Maitland Consultancy.
'The fact old economy blue-chips are being pushed out in favour of
e-businesses yet to make a profit, indicates that being in or out of the
FTSE 100 is not a true reflection of a company's communication ability
or even its true value - it is the vagaries of the market or a
particular sector,' adds Neil Mainland, the IPR's City and financial
Khuram Chaudhry, an equity strategist at Merrill Lynch, says the old
economy might be being pushed out now by the new economy businesses, but
the situation could easily change again by the next quarter.
He says that if you look at new economy companies based on fundamentals
- profits delivery, earnings forecast growth and margins - you have to
question whether they deserve to be in there.
Such volatility, especially in the current market climate, does present
a challenge for the IR practitioner. One of the downsides of dropping
out of the FTSE 100, is that relegated companies could slip further as
funds tracking the FTSE 100 sell the stock, pushing the share price down
even more. It can be a self-fulfilling prophecy.
This is one issue which affects communications as index-trackers
sell-up, according to Mainland. 'Companies have to have an adequate IR
strategy if they fall out to explain that it may be for no other reason
than sector movements or market feeling.
'Most companies now know they have to communicate with fund managers as
institutional shareholder behaviour is more volatile and moves more
quickly,' he adds.
Clutterbuck, although agreeing that good IR is vital, claims that
falling out of the FTSE 100 is not necessarily disastrous for the share
price as few funds track only the leading index.
'The FTSE 100 is less crucial than it was in the 1980s because it is
used less. Trackers use the 350 or all-share index and fund managers do
pan-European or global research,' he says.
'When a company is about to drop out they have to take particular notice
of their IR, but companies that are about to go in have to be careful
not to try to capitalise on it or crow as it can be a very short-term
Most financial PR practitioners agree that these days the FTSE 100 is a
roller-coaster and whether in or out, most companies manage to keep it
Clutterbuck sums it up: 'If you go in at 97 you have to continue to grow
at the same rate as the FTSE or you are considered to be on the way out
next time. If you are at 103 you are considered to be on your way in.'