Mergers & Acquisitions: The Effect on KLD's Indexes

KLD maintains its family of indexes according to transparent, rules-based methodologies. These rules outline the selection, qualification and removal criteria as well as maintenance of the index.

While companies can be removed from KLD’s indexes for declining social performance or financial viability, the most common reason for removal is a corporate action. Corporate actions, or events initiated by a corporation which impact the price or number of shares held by investors, include mergers, bankruptcies, spin-offs, stock splits, and stock dividends.

Index rules are designed to keep turnover low. This protects the integrity of an index as a benchmark. It also minimizes transaction costs for investment vehicles based on the indexes. On average, twenty-one changes to KLD’s indexes occur annually. Corporate actions account for approximately 60% of turnover.

For every merger and acquisition, KLD evaluates both companies, using index criteria for addition. This evaluation uses KLD’s proprietary company research and research on the merger itself. The latter includes SEC filings, investor presentations, investor conference calls, company press releases, news articles, and stakeholder groups.

The KLD Index committee decides whether or not to add, retain or remove the combined company using the following general rules:

• Index Company Acquires an Index Company
  When both the acquiring company and the target company are constituents of the respective index, KLD will, as a general rule, keep the resulting company on the index. In September 2005, Proctor & Gamble acquired Gillette. Both were members of KLD’s indexes and, therefore, the combined company remained on the indexes.

• Index Company Acquires Non-Index Company that Passes KLD’s Index Screens
  KLD index companies that acquire a non-index company are reviewed on a case-by-case basis. KLD reviews the non-index company for significant controversies. If there are no significant controversies, KLD keeps the resulting company on the indexes. If there are significant controversies, KLD either removes the company from the indexes or adds the company to a watch list, depending on the severity of those concerns. KLD’s Index Committee reviews watch list companies’ index status on a monthly basis. In July 2005, Symantec Corporation, a KLD index company, acquired Veritas Software Corporation, a non-index company with no significant controversies. KLD kept the combined company on the indexes.

• Non-Index Company that Passes KLD’s Index Screens Acquires Index Company
  KLD reviews on a case-by-case basis, non-index companies that acquire an index company. If the combined company meets the indexes’ criteria for addition, it will be added to the index. If the company fails, it will not be added. In August 2005, Federated Department Stores, a non-index company, acquired May Department Stores, a KLD index company. KLD did not add Federated Department Stores to its indexes due to racial profiling and labor rights concerns. In November 2003, Idec Pharmaceuticals, a non-index company, acquired Biogen, a KLD index company. Idec had no significant controversies and KLD added the new company, Biogen Idec Inc. to its indexes.

• One of the Companies Fails KLD’s Index Screens
  When a non-index company that fails KLD’s index screens acquires or is acquired by an index company, the combined company will be removed or not added to the indexes. In February 2005, General Electric (GE), a non-index company that fails KLD’s military screen, acquired Ionics, a KLD index company. KLD did not add GE due to is military involvement.

For more information about KLD Indexes, please contact Priya Khetarpal at pkhetarpal@kld.com.