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Mergers: Royal Dutch Shell's index nightmare

Biggest index reweighting since 2000 has caught some investors off guard

The formal merger between Royal Dutch Petroleum and Shell Transport & Trading to form a single listed company called Royal Dutch Shell plc will undoubtedly soothe the headache created by the company's historical dual-board structure, which has been blamed for a host of corporate governance ills. However, the merged company's index reweighting has caused plenty of headaches elsewhere.

The scale of the event makes it no normal reweighting exercise. The merger with Royal Dutch will increase the weighting of Shell in the FTSE 100 and FTSE All-Share indices by 150%, according to Dresdner Kleinwort Wasserstein. The company will also become the UK's second-largest listed company, rising from sixth.

Although there will be passive supply from Royal Dutch's deletion from the Eurostoxx50, passive demand from FTSE UK funds will outweigh passive supply from Eurostoxx50 funds by as much as €5.9 billion, according to research by JPMorgan. Buying pressure is exacerbated by the fact that many UK funds had been underweight Shell since last year.

With smart traders trying to take advantage of the situation, strategies are changing daily. Many hedge funds that anticipated the demand for Royal Dutch shares had started out long Royal Dutch and short Shell, but the performance of the Shell share price has caught them off guard and the trade has gone the other way.

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