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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.
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