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Merrill Nanotech Index Gets Smaller After Two Weeks


16:08 EDT Friday, April 16, 2004

NEW YORK (Dow Jones)--Nanotechnology deals with the science of the tiny. Merrill Lynch's two-week old nanotech index just got smaller.

After introducing its new Nanotechnology Index April 1, Merrill Lynch reversed course Friday and withdrew six companies from its index of 25 nanotech stocks. It also added three new companies.

In a research report, Merrill said the company is abandoning its past criteria which required companies to have a "significant percentage of future profits tied to nanotech," for a more transparent criteria that companies "indicate in public documents that nanotechnology initiatives represent a significant component of their future business strategy."

The investment firm, which said its new methods will make the index more useful in tracking nanotech stocks, also plans to revamp it on a quarterly basis instead of semi-annually.

But at least three of the companies removed from the original index never classified themselves as nanotechnology companies to begin with.

Executives and spokespeople at Applied Films Corp. (AFC), Emcore Corp. (EMKR), and Three-Five Systems Inc. (TFS) all said they don't have a nanotechnology business nor were they ever contacted by Merrill before being included or removed from the index. Others said they don't tout their nanotechnology initiatives, although their work could fall under the auspice of nanotech.

"I don't think we've ever used the word (nanotechnology) in any SEC filing," said Thomas Werthan, chief financial officer at Emcore. The company used to have a business related to metal-organic chemical vapor deposition systems, which he said some might consider nanotechnology, but Emcore sold that to Veeco Instruments Inc. (VECO) five months ago, Werthan said.

Merrill Lynch spokeswoman Susan McCabe said the index is "subjective" and reflects the views of analyst Steven Milunovich and his team. She declined to comment on how the original research for the index was conducted, noting it is " proprietary." Milunovich wasn't immediately available to comment.

Merrill's changes to its index underscore the confusion surrounding this nascent technology. Nanotechnology is the science of fabricating things smaller than 100 nanometers. One nanometer is one billionth of a meter.

With the nanotechnology index, Merrill was attempting to position itself at the forefront of this new technological trend. Milunovich has published several lengthy research reports and held conference calls with investors about nanotechnology over the last two years.

In a research report the day before the index was announced, Milunovich called it the "next major step in the technology space." On top of issuing a research note to announce its newest index, which is meant to track the movement of these stocks, Merrill also promoted it in a press release.

The problem is that companies that make extremely tiny products could be classified as nanotechnology companies, even though they don't describe themselves as such.

Take Universal Display Corp. (PANL), which was also dropped from the Merrill Lynch nanotech index Friday.

A spokesperson at Universal Display said that, while it doesn't identify itself as a nanotech company in public documents, it does feel that its work with organic light-emitting diodes does fall under the auspice of nanotechnology.

Or consider Caliper Life Sciences Inc. (CALP). Stephen Creager, vice president and general counsel, said that while the company doesn't bill itself as a nanotech firm, it has products on the market that are capable of manipulating minute quantities of liquids - sometimes below a picometer, which is one- trillionth of a liter.

Some other companies initially included in the index never said they were doing any work in nanotech at all.

Lawrence Firestone, a spokesman at Applied Films, which makes display equipment, said that following its inclusion in the Merrill index it fielded calls from investors curious as to how the company ended up on a nanotechnology index. He said that Applied Films never classified itself as a nanotech company.

During their time on the index, Three-Five Systems' shares increased 10%, while Universal Display's stock gained 6.7%. Others that were removed Friday saw marginal increases of anywhere from 1% to 5%.

On Friday, after being dropped, shares of Three-Five declined 7%, while Universal Display was down 1.2%, and Emcore was off 3%. Meanwhile, shares of Applied Films traded 3% lower, and Caliper Life was up 3.5%. Nanometrics Inc. ( NANO) which was also removed from the index, was recently off 4.7%. Officials at Nanometrics weren't immediately available to comment.

The Merrill nanotech index is listed on the American Stock Exchange under the ticker NNZ. It is currently down 3.5%.