Giant technology companies may have conquered Wall Street over the course of the 21st century but in the UK the largest companies that make up the FTSE 100 still largely come from more traditional industries. But industrial software giant Aveva is set to become the third software company in the blue chip index when changes are confirmed next week. The other two are Sage and Micro Focus.
Aveva’s place looks likely to come at the expense of Easyjet. The budget airline will drop down into the FTSE 250, with its share price having fallen by over 50% in the past 12 months. Aveva’s rise has been in direct contrast to Easyjet’s fall, with its own share price up 70% since it merged with Schneider Electric last March through a reverse takeover.
As well as its increased scale following the Schneider takeover, Aveva is benefitting from an acceleration of the digitalisation process in the industry’s the company builds enterprise software for. The Cambridge-based industrial software company was founded in 1967 and helped develop 3D computer design.
2018’s reverse takeover merge with France’s Schneider Electric, which saw Aveva pay out £650 million to shareholders, has doubled the company’s size. The combined entity, whose software applications are used in industries such as manufacturers, miners and ship designers, has 16,000 customers and employs over 4500, mostly highly-skilled, staff.
The tie-up has gone well so far with CEO Craig Hayman recently stating that over 50% of the £25 million in cost efficiencies targeted from combining the two companies’ operations have already been achieved. The fiscal year ending March also delivered a 12% rise in adjusted revenues to £775.2 million and 20% growth in underlying earnings to £184.5 million. Pre-tax profits were £46.7 million, up from £34.5 million a year earlier. Shareholders were rewarded by a 2p increase in the dividend to 29p per share.
The FTSE 100 index of the 100 largest companies by market capitalisation listed on the London Stock Exchange is updated quarterly. Most quarterly updates see at least one or two companies in the FTSE 100 and FTSE 250, made up of the next largest 250 companies on the exchange, exchange indices.
Being a constituent of the FTSE 100 is in itself a significant boost to a company’s share price because of the amount of global capital invested in passive index-tracking funds. That means that a FTSE 100 company’s shares are automatically bought as part of an index tracker, regardless of the current financial performance of the company. That pushes up demand for shares, and so their price. As a result, it is much more of a challenge for a company to reach the promised land of the FTSE 100 than it is for a current constituent’s share price to drop enough to be replaced by a FTSE 250 pretender.
With the amount of capital invested in index tracker funds growing, critics argue that the share price of companies is being less affected by their actual performance and prospects and more by their position as an index constituent. However, many other investors, including index investing evangelist, the late John Bogle who founded Vanguard and passed away in January of this year, insist that the overall percentage of global capital invested in indices is still far too small to skew markets in that way.