The Dow Jones & Co., a subsidiary of News Corp. (NWS, NWSA), said Monday that automaker General Motors Corp. (GM), which filed for bankruptcy earlier in the day, will be replaced in the Dow Jones Industrial average by Cisco Systems Inc. (CSCO). Meanwhile, Citigroup Inc. (C) will be replaced on the benchmark stock index by Travelers Companies Inc. (TRV), which was spun off from the company in 2002. The changes are effective with the opening of trading on June 8, 2009.
General Motors, or GM, said that it has filed for bankruptcy under Chapter 11 in the United States Bankruptcy Court in the Southern District of New York. The bankruptcy, which was widely expected, is part of a government-aided restructuring effort. Once a company files for bankruptcy protection, it is automatically disqualified for membership in the stock index.
GM, for decades considered an icon of American manufacturing, ends an 83-year run as a component of the Dow Jones Industrial Average. The automaker was added twice, first for about a year and a half in 1915, and second in August 1925. The only current component on the index with a longer history is conglomerate General Electric Co. (GE). GE was in the original Dow in 1896, but was removed and restored a couple of times. However, it has been a component steadily since 1907.
GM has reported losses of almost $88 billion since 2004, while its share of the U.S. market has dropped to 19% from more than 40% in 1980.
GM's ouster from the index was expected after John Prestbo, editor and executive director of Dow Jones Indexes, said in early May that the automaker would come out of the index in the event of a bankruptcy filing. Prestbo noted that both Citigroup and GM were retained as Dow components in recent months despite their low prices.
Robert Thomson, managing editor of the Wall Street Journal and editor-in-chief for all of Dow Jones, said, "The parlous state of GM has left us with no choice but to remove it from The Dow. A bankruptcy filing immediately disqualifies a stock regardless of a company's history or its role as a cultural icon."
Thomson said that Cisco, the replacement for GM, is a fitting addition "because its communications and computer-networking products are vital to an economy and culture still adapting to the Information Age - just as automobiles were essential to America in the 20th Century."
San Jose, California-based Cisco is the world's largest computer networking gear maker. Cisco mainly sells routers and switches to corporates, but it has diversified in recent years. The company has moved into the consumer market thanks to its acquisition of companies like Linksys and Scientific Atlanta, which by make Wi-Fi equipment for the home and cable set-top boxes. In March this year, Cisco announced that it would start selling a server of its own.
Citigroup will leave the 30-component Dow Jones index next week and has been replaced by the Travelers Companies. Citigroup has been going through a bad patch for the past few quarters, thanks to dire economic conditions and credit losses. The company is currently in the process of converting preferred stock into common shares, giving the U.S. government a 34% stake in the company.
Citigroup joined the Dow on March 17, 1997 as Citicorp. Ironically, Travelers merged with Citicorp to form Citigroup in 1998, creating what was then termed a "financial supermarket." Citigroup spun off Travelers in 2002.
Thomson also said, "We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake. We genuinely hope that once the bank has refashioned itself that we will again be able to consider it for inclusion - Citigroup is a renowned institution, not only in this country, but around the world."
Thomson said that the selection of Travelers, a Minnesota-based property and casualty insurance company, is intended to restore the financial industry to full representation in the Dow. He noted that when American International Group Inc. (AIG) was removed from the index last fall, it was substituted with packaged food processor Kraft Foods Inc. (KFT) rather than another financial stock, as the financial sector was then in great upheaval.
In September 2008, AIG was replaced by Kraft Foods on the Dow Jones industrial average. AIG's government bailout after it plunged into one of the worst liquidity crunches in the financial markets led to a substantial drop in its share prices and also contributed to its removal from the index.
The Dow Jones Industrial Average was created by Charles Dow as a 12-stock index in May 1896 and is among the best-known stock market barometers in the world.
In Monday's regular trading session, CSCO is trading at $19.32, up $0.82 or 4.43% on a volume of 42.65 million shares. In the past 52 weeks, the stock has been trading in a range of $13.61-$27.72.
TRV is currently trading at $42.25, up $1.59 or 3.91% on a volume of 3.22 million shares. The stock has been trading in a range of $28.91-$58.57 in the past 52 weeks.
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