The Timken Company (Canton, Ohio) is losing its place on the influential S&P 500 Index on August 7, 2001.

Standard & Poor's, a division of McGraw-Hill (New York, New York), announced that Timken will be replaced on the Index by Zimmer Holdings, a specialty medical device company. The change also shifts some of the S&P 500 weighting away from Industrials in favor of Health Care.

Standard & Poor's gave no specific reason for Timken's removal. S&P does state, "company additions to and deletions from an S&P equity index do not in any way reflect an opinion on the investment merits of the company."

Upon removal from the S&P 500, Timken will be added as a component of the S&P SmallCap 600 in the Industrial sector. The SmallCap 600 is a fairly new index, "for the small company segment of the U.S. market."

After this realignment, only 39 companies - less than 8% - of the S&P 500 will represent Industrials. In contrast, 125 companies - almost 21% - of the SmallCap 600 are Industrials.

The S&P 500 is "widely regarded as the standard for measuring large-cap U.S. stock market performance," including a "representative sampling of leading companies in leading industries," according to Standard & Poor's. The Index, widely referenced in the media, is also used by 97% of U.S. money managers and pension plan sponsors.

More than $1 trillion in managed investment is keyed to the S&P 500 roster of companies. Of that, over $750 billion is in mutual funds and pension plans which are chartered to track the S&P 500. This means the fund managers will be scrambling to buy Zimmer while selling off all of their Timken shares as quickly as possible.

With so much any-price selling hitting an already soft market all at once, Timken's share price can be expected to suffer over the short and medium term as the shares are absorbed. The advantage for Timken is that many of the buyers who follow S&P 500 sell-offs are long-term investors looking for bargains.

Being removed from the S&P 500 represents a significant challenge for Timken, not only in terms of image and downward pressure on its stock price, but also coming as it does on the heels of a debt rating downgrade only a few days ago. At the same time, the company is in a high-profile struggle to adjust rapidly enough in a recessionary industrial economic climate.

On July 27, Moodys Investors Service downgraded Timken's long-term senior debt from "A3" to "Baa1", affecting approximately $717 million in debt. Moodys cited continuing erosion of demand for Timken bearings and reduced its outlook for Timken's credit rating from "stable" to "negative".

Contrary to popular belief, the S&P 500 Index is a qualitative selection of companies, chosen by S&P and "designed to be reflective of the market." It is not a quantitative selection by market capitalization, sales or any other numerical measure.

There are indexes based on strictly quantitative measures. They include the Russell 3000 and Russell 2000 which contain Timken, the Russell 1000 which does not, and the Wilshire 5000 Total Market Index (now over 6,500 stocks) which contains Timken and all other widely traded issues.

On average over the past year, four companies have been removed or replaced on the S&P 500 each month, primarily due to mergers and acquisitions.

Timken shareholders may be heartened to learn that, of the companies removed from the S&P 500 during 2000, all but six have a higher share price now than when they were removed.