Creation and destruction in 20 years of FTSE 100 changes

Britain's leading stock market index celebrates 20th anniversary
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The Independent Online

Happy birthday to the Footsie. The FTSE 100, London's premier stock market index and barometer of UK plc, is 20 years old in the new year.

When the debut 100 were grouped together for the first time in 1984, Margaret Thatcher's programme of privatisation had barely begun and the idea of getting a windfall from the conversion of your building society into a bank was yet to enter even the Prime Minister's wilder dreams.

The end of the fashion for conglomerates; the ground breaking £3.9bn privatisation of British Telecom; the consolidation and internationalisation of many of Britain's biggest industries; the precipitous decline of its manufacturing base: all were just around the corner in 1984.

The FTSE 100 has risen from 1,000 at inception to 4,424 yesterday - about the same rise as the average UK house over the period - but it peaked on the eve of the Millennium at 6,930.2.

The most striking element of a comparison between that debut list and the current FTSE premiership is that the same company tops both. Yet British Petroleum's journey from there to here has been one of convulsive merger and acquisition activity that reflects the fortunes of many of the stocks below it in both lists.

BP went on to make a string of acquisitions, including at one point becoming BP Amoco in deference to the US half of the mega-merger that put it back in contention for the number one slot in 1999. Other oil companies on the original list were unable to lead consolidation and instead fell victim to it: Britoil, an early privatisation, is no more and Ultramar was subsumed by Lasmo, now a part of Italy's ENI.

Just 23 of the original 100 survive today, but even fewer exist in anything like their original shape. BAT Industries exists near the top of both lists, but in 1984 it was a conglomerate readying a bid to take control of the insurance group Eagle Star, not, as today, a tobacco company simply looking for new geographical markets for its cigarettes.

Hanson was a sprawling conglomerate in 1984, now it is shorn down to its construction materials business. Imperial Group was later part of Lord Hanson's monster creation before returning in the 1990s as Imperial Tobacco.

Yet vast new companies have been created, in several cases through the sheer will of an individual. The advertising boss Sir Martin Sorrell began the rags-to-riches-to-rags-to-riches tale that is WPP only in 1985. Shire Pharmaceuticals was built up through acquisitions by Rolf Stahel in even shorter order. Vodafone was spun out of Racal Electronics and turned into a £93bn global giant through the strength of Sir Christopher Gent's deal making. And Sir Ken Morrison's eponymous supermarket giant has also grown from humble beginnings - although it is more than 20 years old.

The big name departures are more striking, none more so than General Electric's collapse after conversion from staid stalwart of the index to racy telecoms stock. The engineer BTR became the backbone of Invensys, and has also spectacularly fallen from grace.

The FTSE 100 index was conceived originally by Liffe, the futures exchange, which needed an efficient measure of the stock market to enable the creation of complex derivative products with which investors could hedge their exposure to market movements. The Stock Exchange was brought on board later, and the index was almost called the SE100 until Richard Lambert, the new editor of the Financial Times, took umbrage at the snub to the existing FT30 index and guaranteed a continuing association for the newspaper.

Unlike the old FT30, a restricted and highly selective measure of UK plc calculated only once an hour, the FTSE 100 was to be calculated minute-by-minute from prices jotted down by Stock Exchange runners on the trading floor. Peter Sterlini, one of those runners and now corporate actions manager at FTSE, says: "The FT30 used to be known as the Industrial 30. It contained the likes of ICI and Beechams, but there was not a widespread flavour to it. The FTSE 100 was the top 100 companies by market value, without any prejudice and it covered the market most broadly."

It meant the start of the rise and rise of the financial companies, which became a significant force in the FTSE 100 and were swelled by the demutualisations first of the building societies and later of the life insurers. For example, Commercial Union and General Accident were able later to swallow Norwich Union and became Aviva while the Woolwich came and went into Barclays.

There is criticism still of the reshuffles by which the index members are readjusted to reflect the new top 100 companies after three months of share price movements. Yesterday was the first day's trading back in the index for shares in British Airways and Hays, the former conglomerate now slimmed down as a recruitment group. Mitchells & Butlers, the pubs business of an original index member, Bass, has just been demoted, leaving InterContinental Hotels as the only FTSE 100 remnant of the old brewing and leisure conglomerate.

David Schwartz, the stock market historian, worries about the distorting effect of the "ins and outs" and the inherent upward bias that comes from periodically dropping the weakest members. He says: "What a way to keep the market up. In March 2000, a large number of technology companies joined the index, but they were all dropped soon after. How big a fall was there? I don't know what the devil it is measuring."