Churn, longevity and the FTSE 100
For a project that ended up taking me a lot longer than I had hoped, I've been doing some research into the FTSE 100, that index of super-large companies traded on the London Stock Exchange that represent something like 81% of the entire market capitalization of all companies listed on the London Exchange. It is a widely watched barometer of economic well being. I was curious to see if the stability of the FTSE 100 bore any resemblance to the pretty substantial churn Richard Foster found in his studies of the S&P 500. Now, remember, we are talking huge companies here – one that i was looking at (S4S) has over 600,000 employees!
Nonetheless, the churn numbers are interesting. A first thing I thought was intriguing is how many companies got on the list only to get off the list only to get on it again. Companies like Rolls Royce, Rexam, WPP and Next have come and gone .. and come and in cases gone again. The average churn rate (when one company is added to the index and another is deleted) over the years since the Index was created in 1984 is 14.2% – on average over 10% of the companies listed on the index change every year! In a really traumatic year (2000) the churn rate was a whopping 35%. Of the 100 companies on the list in 1984, only 24 remain in that position today. And many of the initial companies that have disappeared have done so because they were taken over the multinational firms, often from other countries.
The firms themselves have also undergone substantial changes, often through major mergers and disposals as they work their way from one kind of business to another. But here's a really interesting statistic (at least I found it to be interesting). I took as the "founding" of the firm the first incorporated commercial entity to which it could trace its roots. So for instance, the Royal Bank of Scotland can trace its commercial activities back to 1727! So that is a very conservative take on firm age. I didn't for instance take as "founding" the recent incorporation of two merged entities (for instance, the recent merger between British Airways and Iberia that created the International Consolidated Airways Group (horrible name, don't you think?). The average age of the FTSE 100 in 1984? 99.1 years, with a median age of 91 years. The average age of the companies in the 2012 index? 98.4 with a median of 88 years.
So despite the doom and gloom about competitive intensity and the undeniable fact that some firms did actually go bankrupt that were once part of the index (British Commonwealth Shipping, Ferranti, and MFI Furniture), the companies that made it to the top of this particular heap seem to show a remarkable longevity. I think it means that although firms do struggle with changing technologies, global competition and the formation of new industries, that they show a remarkable propensity to mount an adaptive response.
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