Cisco Edges Microsoft in Market Valuation

Cisco Systems, the maker of ubiquitous but largely unseen computing devices that route information across the Internet, surpassed Microsoft on Monday as the world’s most valuable company, marking the Internet’s emerging status as the dominant force of the new economy.

Barely a decade after becoming a public company, Cisco’s stock nudged up 69 cents Monday to close at $80.06 a share on Nasdaq. That was just enough to push the total market value of all the company’s shares to $555.4 billion--or $14 billion above Microsoft.

Microsoft’s stock fell Monday because of uncertainties over whether its settlement offer will end a landmark antitrust case with the Department of Justice.

But in the broader view, Cisco’s rise marked a milestone in the ongoing technological revolution. This is the first time an Internet company, a Silicon Valley company or a California company has risen to the top of the global heap, joining the ranks of such behemoths of the past as Standard Oil, General Motors, IBM and, most recently, Microsoft, the software giant that defined the age of the personal computer.

Cisco, based in San Jose, is known for computer devices called routers that look at each piece of information that passes the junctions on corporate networks or the Internet and send it to its proper destination. So when someone requests a Web page from America Online, more than likely their request will go through several Cisco routers to get there and get back.

“Internet, Internet, Internet,” said Robert Cohen, a research fellow with the Washington, D.C.-based Economic Strategy Institute. “The whole area has become a tidal wave.”

Analysts described Cisco’s move upward as part of an inexorable evolution in technology in which influence has begun to shift away from the companies that created the personal computer, such as Microsoft, Intel, Dell and Apple Computer, and toward the new generation of companies, such as Cisco and database maker Oracle, that are powering the global networks of the future.

Business as Usual at the New No. 1

For all the symbolism of Cisco’s rise, it was largely business as usual Monday at the company. Cisco Chief Executive John T. Chambers, 50, who has been the chief architect of the company’s rise, was away in Europe visiting with customers.

And unlike flamboyant executives such as Microsoft’s Bill Gates or Apple’s Steve Jobs, Chambers is a rather low-key executive who seems more like a technocrat. But the West Virginian has consistently been named by business magazines as among the best executives in the country.

Chambers has guided Cisco on a strategy of becoming a one-stop shop that could provide computer networking gear for corporations, telecommunications and Internet businesses.

The only statement on Monday’s milestone came from Larry Carter, Cisco’s chief financial officer, who said: “The Internet is driving the most prosperous economy in history, and we are fortunate to be part of it. We are humbled to be among the most valuable companies.”

Microsoft, which rarely says much about its daily stock fluctuations, downplayed the switch in positions.

“While growing shareholder value is important, Microsoft has never put undo emphasis on its market capitalization,” said Microsoft spokeswoman Caroline Boren.

Microsoft first passed General Electric as the world’s most valuable company in September 1998.

But USC finance professor Tim Campbell said there is a powerful message about the new economy embedded in the simple statistic of the two companies’ market capitalization.

In the past, a company’s stature was often based on its annual revenue. Indeed, that is the basis for the rankings of the annual Fortune 500 list.

But in the go-go technology revolution, market capitalization, which measures investors’ perceptions of a company’s future, often carries more weight.

In last year’s Fortune 500 list, for instance, Cisco ranked only 192nd in revenue with $8.5 billion, while General Motors topped the list with $161 billion. But as of Monday, GM’s total stock market value was $53 billion, or about one-tenth the value of Cisco.

“The whole concept of a stock price is a belief in what the future will be,” Campbell said.

Despite Cisco’s prominence in technology, it is one of the least known companies among the general public. Unlike Microsoft, General Electric and Intel, whose products are scattered through everyday life, Cisco’s line of advanced routers and networking devices are tucked away in protected computer rooms.

The core of Cisco’s business is making routers, the main building blocks of the information infrastructure.

The company was founded in 1984 by Sandy Lerner and Leonard Bosack, a husband and wife team at Stanford University who had worked on a project connecting 5,000 of the school’s disparate computers into a single network.

Lerner and Bosack struck on the idea of building a “multi-protocol” router--a device to interpret between the various standards that computers use to communicate with each over a network. Instead of forcing computer makers to all speak the same tongue, the router simply used its own computing power to quickly interpret the babble. Lerner and Bosack left the company in 1990 with about $170 million.

The modern history of Cisco has been directed almost entirely by Chambers, who came to Cisco in 1991 after stints at IBM and Wang Laboratories and has been running the company since 1995.

Chambers, whose Cisco stock is now worth a little over $1 billion, has deftly guided the expansion of the company, adding new products to match the increasing size and complexity of modern computer networks and buying other companies when necessary.

While other companies focused on the different pieces needed to hook computers together, Cisco’s focus on high-speed routers put it in a prime position when the Internet took off in the mid-1990s.

“Cisco ended up being at the heart of all networks,” said Farrokh Billimoria, a general partner with Sprout Group, a venture capital firm in San Francisco.

A Powerhouse in Routers Business

Cisco now controls 80% to 90% of the market for high-end routers that form the core of the Internet. It has a lesser, but still imposing share of the less-powerful routers and switches that power corporate networks.

Microsoft’s rise to prominence is, in contrast to Cisco’s, one of the best known in the industry.

High school chums Gates, now 44, and Paul Allen produced the first operating system for the IBM personal computer in the early 1980s and gradually evolved the product into the ubiquitous Windows system that sits on about 90% of all personal computers.

Unlike Cisco’s roots in multilingual devices, Microsoft has pursued a strategy of channeling the world through the proprietary prism of its Windows operating system. That strategy has powered Microsoft to its dominant position, in the process making Gates the world’s richest man, worth more than $85 billion.

But the need to create ever more powerful desktop programs has begun to wane as users realize that the most powerful function of the computer is not necessarily computation, but rather, communications.

“It’s all about a shift in generations, from PC-based applications to the Internet,” said Robert Foster, a professor of finance at UCLA’s Anderson School. “The PC is being replaced by a new paradigm.”

Cohen of the Economic Strategy Institute called Microsoft a kind of “old world company” that will continue to prosper, but not as directly as those companies that have staked their existence on the Internet.

Cisco’s move ahead of Microsoft could change, because the stocks of both companies tend to ebb and flow over a wide range.

And Microsoft is itself a powerful Internet force, supplying free browsers for consumers, database programs for e-commerce and Internet access for the masses through its Microsoft Network.

But in many ways, Microsoft’s antitrust problems stem from its efforts to bring the wide-open spaces of the Internet into the Windows world as well.

“Microsoft has a real challenge on its hands to react to the Internet, and I don’t think they’ve figured it out,” said Foster, the UCLA professor.

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History of Value

Cisco Systems Inc. ranks as the most valuable company as of Monday, based on total stock market value. A look at top companies since 1980, based on market value at year-end:

Year: March 27, 2000

Company: Cisco Systems

Market value in billions: $555 billion

Year: 1999

Company: Microsoft

Market value in billions: $604 billion

Year: 1998

Company: Microsoft

Market value in billions: $346 billion

Year: 1997

Company: General Electric

Market value in billions: $240 billion

Year: 1996

Company: General Electric

Market value in billions: $163 billion

Year: 1995

Company: General Electric

Market value in billions: $120 billion

Year: 1994

Company: General Electric

Market value in billions: $87 billion

Year: 1993

Company: General Electric

Market value in billions: $89 billion

Year: 1992

Company: Exxon

Market value in billions: $75 billion

Year: 1991

Company: Exxon

Market value in billions: $76 billion

Year: 1990

Company: IBM

Market value in billions: $65 billion

Year: 1989

Company: Exxon

Market value in billions: $63 billion

Year: 1988

Company: IBM

Market value in billions: $72 billion

Year: 1987

Company: IBM

Market value in billions: $70 billion

Year: 1986

Company: IBM

Market value in billions: $73 billion

Year: 1985

Company: IBM

Market value in billions: $96 billion

Year: 1984

Company: IBM

Market value in billions: $75 billion

Year: 1983

Company: IBM

Market value in billions: $74 billion

Year: 1982

Company: IBM

Market value in billions: $58 billion

Year: 1981

Company: AT&T;

Market value in billions: $48 billion

Year: 1980

Company: IBM

Market value in billions: $40 billion

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Source: Standard and Poor’s

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Cisco Systems Inc.

Founded: 1984 by Len Bozack and Sandy Lemer Products: Supplies data networking products to businesses, universities and governments Headquarters: San Jose, Calif.

Market capitalizations: $555.4 billion Sales: $15 billion (last 12 months)

Net income: $2.6 billion (last 12 months)

Employees: 26,140

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Microsoft Corp.

Founded: 1975 by William H. Gates and Paul Allan

Products:Develops, manufactures, licenses and sells software products

Headquarters: Redmond, Wash.

Market capitalization: $541.6 billion

Sales: $21.9 billion (last 12 months)

Net income: $8.7 billion (last 12 months)

Employees: 34,751

Most Valuable Companies

The world’s top firms in terms of total stock market value, based on Monday’s closing prices:

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Rank Company Market value, in billions 1 Cisco Systems $555.4 2 Microsoft $541.6 3 General Electric $520.5 4 Intel $476.9 5 Nokia $266.5 6 Exxon Mobil $266.2 7 Deutsche Telekom $259.6 8 Oracle $249.5 9 Wal-Mart Stores $246.9 10 Nippon Telegraph & Telephone $232.9

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Source: Bloomberg News