Nasdaq OMX Group Inc. (NDAQ)’s waiting period for entry into one of its best-known stock indexes was a negotiating point with Facebook Inc. (FB) as the company weighed where to list its shares, according to a person with direct knowledge of the matter.
The second-biggest U.S. stock exchange operator said on April 13 that it was shortening the so-called seasoning period before new companies are admitted to the Nasdaq-100 Index to three months from at least one year. Facebook confirmed this week it is listing on Nasdaq Stock Market. The social-networking website based in Menlo Park, California, filed to raise $5 billion in February.
Gaining entry to gauges tracked by investors is attractive to public companies because it provides a guaranteed shareholder base. Exchange-traded funds and other products linked to the Nasdaq-100 managed about $49.4 billion at the end of last year, according to data compiled by Nasdaq.
“The more liquidity support that the stock has, the better, in their view,” Perry Piazza, director of investment strategy at Contango Capital Advisors in San Francisco, who helps oversee about $3.3 billion, said in a telephone interview. Going into the Nasdaq-100 “would help the trading volume of Facebook dramatically,” he said.
A person with direct knowledge of the decision said April 5 that Facebook decided to list on Nasdaq. Eight days later, the New York-based exchange operator shortened the time a company must be listed on a “recognized market” before becoming eligible for the Nasdaq-100. It used to be at least two years, or one if a stock would be among the top 25 shares in the index by market value.
The rule change was implemented on April 23, the day Facebook disclosed in a regulatory filing that it picked Nasdaq over the New York Stock Exchange. The shift also applied to the Nasdaq Financial-100 Index and Nasdaq Biotechnology Index.
Facebook’s Jonathan Thaw, a spokesman, declined to comment. John Jacobs, executive vice president and head of the global index group at Nasdaq OMX, declined to comment on Facebook or any other company.
“It was very simply a housekeeping of index methodology,” Jacobs said in a phone interview. The exchange studied the benefits of shortening and lengthening the waiting time and decided that reducing the period “makes the index more relevant” by incorporating the biggest companies more rapidly, he said.
Annual changes to the Nasdaq-100, a gauge of non-financial companies, are announced in early December. Should a company fail to meet listing requirements at any time during the year, it is replaced by the Nasdaq-listed security with the highest market value, according to the exchange’s website.
Nasdaq lured Dallas-based Texas Instruments Inc. (TXN) from the NYSE in January, the biggest company ever to make the switch. Three months later, the world’s largest maker of analog semiconductors entered the Nasdaq-100.
The exchange has been fending off increasing competition from NYSE, which accounted for 57 percent of proceeds raised in equity offerings for technology companies last year and increased that to 67 percent this year through April 19, according to Ipreo Holdings LLC, a New York-based provider of markets data and analytics. The NYSE has claimed more than half of all IPOs every year starting in 2008, the firm said.
Tracking the Index
ETFs and other products created to track the Nasdaq-100 must buy companies included in the measure to fulfill their mandate. Texas Instruments makes up 1.2 percent of the gauge, which serves as the basis for the PowerShares QQQ (QQQ) Trust, the U.S. ETF with the fifth-highest average daily trading volume in 2012, according to data compiled by Bloomberg.
Membership in the index doesn’t guarantee a company will stick with Nasdaq. Teva Pharmaceutical Industries Ltd. (TEVA), which makes up 1.06 percent of the measure, said in March that it’s leaving for the NYSE at the end of May.
The prospect of getting into the Nasdaq-100 may have prompted Facebook to choose Nasdaq over the NYSE, Josef Schuster, founder of Chicago-based Ipox Schuster LLP, said in a telephone interview. His firm has about $2 billion tied to indexes that track IPOs.
If Facebook gets an index weighting of 3 percent, the PowerShares QQQ “could create $2 billion of systematic demand” for the stock, he said. “It has to be bought, whether it’s high or low, cheap or expensive, so it’s strategically important.”
Facebook may expand its IPO to as much as $10 billion, seeking a market value of $75 billion to $100 billion, people familiar with the plans have said. Only eight companies in the Nasdaq-100 have a market capitalization exceeding $100 billion, according to data compiled by Bloomberg.
Schuster said he’s not sure if his funds will own Facebook because the number of publicly available shares as a percentage of the total may be too low. The smaller IPO size, at the low end of that valuation range, would make 6.7 percent of Facebook shares publicly traded, while a larger sale would give it a float of 10 percent.
At that level, Facebook would join Internet companies such as Groupon Inc. and LinkedIn Corp. in boosting demand by floating less than the usual amount. In a typical offering, investors get shares representing closer to 20 percent of the company, according to Paul Deninger, a senior managing director at New York-based investment bank Evercore Partners Inc.
Traders use the Nasdaq-100 to bet on the technology industry, according to Leo Guzman, president of Guzman & Co. Computer-related stocks make up 68 percent of its value, according to data compiled by Bloomberg.
“The Nasdaq-100 is essentially a trading vehicle where a trader can gain derivative exposure to the technology markets,” Guzman, president of the broker in Coral Gables, Florida, said in a telephone interview. “Membership in the S&P 500, Russell 2000 and MSCI indexes enable you to get more long-term investors.”
More than $5.58 trillion was benchmarked to the Standard & Poor’s 500 Index, with $1.31 trillion directly linked to the index, at the end of 2010, according to S&P’s website.
Berkshire Hathaway Inc., billionaire Warren Buffett’s insurance and investment firm, was picked to join the S&P 500 in January 2010. Index funds may give Berkshire shares stability, Buffett told shareholders that month.
“You’ve got a permanent stockholder for 6 or 7 percent of your shares,” Buffett said at the time. “We like permanent shareholders. That’s exactly what we’re looking for.”
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