next week will horn in on
, which could push 3Com's stock all over the place.
Standard & Poor's
announced earlier today that it would add Palm, the 3Com spinoff, to its
S&P 500 index after the close of trading July 27.
Unlike the recent additions of
, there won't be a frenzied buying wave of Palm by index fund managers, who run funds that mirror the index. That's because these fund managers won't have to buy Palm shares. 3Com is in the S&P 500 already, so these managers already are 3Com shareholders. And like all 3Com shareholders, they'll receive 1.484 Palm shares for each 3Com share they own as part of the spinoff, a transaction in which a company distributes ownership of a subsidiary to its shareholders.
However, there could be strong pressure on 3Com's stock after the distribution because the Palm business accounts for most of 3Com's
market capitalization. 3Com's stock has rallied in the past several weeks, rising from 45 11/16 at the beginning of June to 68 1/16. But the "when-issued" stock -- that is, the stock that will represent 3Com following the spinoff of Palm -- was lately trading at 13, as investors value the company at much less when missing one of its largest parts. The when-issued stock is trading under the symbol COMSV.
Palm Gets Slapped
In addition to the pressure from the loss of Palm, S&P 500 managers will also be selling 3Com because it'll leave the index. But the stock will be added to the
S&P MidCap 400 Index
. So those index fund managers will be required to buy the stock for indexing purposes, which will somewhat blunt the impact of S&P 500 index managers selling 3Com.
All told, S&P 500 index funds will sell about 27 million 3Com shares, while about 9.7 million shares are to be bought by mid-cap managers, according to Andrew Whittaker, vice president and equity derivatives analyst at
. That results in net selling of about 17 million shares by indexers, equivalent to about five days of 3Com volume, possibly creating additional pressure on a stock poised to fall anyway.
"There'll be some pressure," Whittaker said. "But if there's a strong tech tape that day, there'll be more people willing to buy."
Climbing Back Up
Whittaker estimates that indexers will have to buy an additional 3.4 million Palm shares on the open market because S&P 500 index fund managers are receiving the equivalent 95% of 3Com. So to adequately represent Palm, they'll need a little more. That 3.4 million shares accounts for less than half a day of trading volume. That's about $129 million, which in terms of market-moving events, is nothing, especially when considering indexers were forced to
buy about $2.5 billion in Broadcom stock. They were forced to buy $4.5 billion to $5 billion in Yahoo! when it was added to the index on Dec. 7, 1999, helping send the S&P 500 down 1% because investors had to sell so much stock to buy the Yahoo! stock.
"Effectively, 3Com has 94.3% of Palm," said Steve Kim, equity derivatives analyst at
. "When Palm gets spun off and added to S&P 500, you have to buy to represent that other 5.7%. You're not looking at much buying -- maybe a half a day's worth of Palm volume. We don't think it's that much to influence anything."
Palm currently carries a market capitalization of about $20.7 billion, which will rank it around 140th in the S&P 500. 3Com, meanwhile, will carry a market cap of about $4.5 billion.