A bankruptcy filing by General Motorsgm would not only send one of America's most storied automakers into further upheaval, it would also force a shake-up in the Dow Jones industrial average.
Once a company files for bankruptcy protection, it is disqualified from being one of the 30 Dow components, said John Prestbo, editor and executive director of Dow Jones Indexes.
As for a replacement, that decision rests with the managing editor of The Wall Street Journal, Robert Thomson. GM, which was added to the Dow Jones industrials in 1925, has been hammered as the economy worsened and new car sales plummeted. Shares of GM have lost 64% of their value since the beginning of the year and 97% since they reached a multiyear high in October 2007. The Dow, meanwhile, is down 5.4% this year, and 41.4% since reaching its record high of 14,164.53, also in October 2007.
GM's replacement wouldn't have to be another automaker or even another manufacturing or industrial company. There are no hard rules as to which companies make up the index. The main goal is to try to duplicate in the Dow the weights of all market sectors, excluding utilities and transportation companies, Prestbo said. The Dow has separate indexes to track utilities and transportation firms.
In a research note last month, Nicholas Colas, chief market strategist for BNY ConvergEx Group, laid out seven possible replacements for GM: bankers Goldman Sachs and Wells Fargo; high-tech firms Cisco Systems, Apple, Google and Oracle; and agricultural products maker Monsanto.
Kenneth Froewiss, a professor of finance at New York University's Stern School of Business, said a company's addition to the Dow would likely have little impact on its stock. Fewer mutual funds track or mimic the Dow than they do broader indexes such as the Standard & Poor's 500. That means there would be little more than some added publicity for the company that replaces GM, he said.
However, GM is also a component of the S&P 500, so a company chosen to replace it in that index could see a blip up in trading when funds that track the S&P 500 buy its shares.
GM would be the second firm to be removed from the Dow amid the ongoing economic crisis. Last September, insurer American International Group was removed after the government took an 80% stake in the firm to help it avoid complete collapse. AIG was replaced by Kraft Foods on Sept. 22.
A bankruptcy filing could also lead to GM's delisting from the New York Stock Exchange.
While GM currently meets all the minimum requirements for trading, a bankruptcy filing would spark a review among the qualitative standards that the exchange uses to determine if a company should be listed. Qualitative standards include the impact of bankruptcy filings, liquidity concerns or debt defaults.
If GM's share price or other trading data fall below certain thresholds, that could also trigger a delisting.
Only one company currently under bankruptcy protection, W.R. Grace, is listed on the NYSE.