THE DARK SIDE OF VALUATION
In 1990, the ten largest firms, in terms of market capitalization, in the world were
industrial and natural resource giants that had been in existence for much of the century.
By January 2000, the two firms at the top of the list were Cisco and Microsoft, two
technology firms that had barely registered a blip on the scale ten years prior. In fact, six
of the ten largest firms1, in terms of market capitalization, at the beginning of 2000 were
technology firms, and amazingly, four of the six had been in existence for 25 years or less.
In an illustration of the speeding up of the life cycle, Microsoft, in existence only
since 1977, was considered an old technology firm in 2000. The new technology firms
dominating financial markets were the companies that use the internet to deliver products
and services. The fact that these firms had little in revenues and large operating losses had
not deterred investors from bidding up their stock prices and making them worth billions
In the eyes of some, the high market valuations commanded by technology stocks,
relative to other stocks, were the result of collective irrationality on the part of these
investors, and were not indicative of the underlying value of these firms. In the eyes of
others, these valuations were reasonable indicators that the future belongs to these internet
interlopers. In either case, traditional valuation models seemed ill suited for these firms
that best represented the new economy.
Defining a Technology Firm
1 The six firms were Cisco, Microsoft, Oracle, Intel, IBM and Lucent. Of these only IBM and Intel had
were publicly traded firms in 1975. Microsoft went public in 1986, Oracle in 1987 and Cisco in 1990.
Lucent was spun off by AT&T in 1996.
What is a technology firm? The line is increasingly blurred as more and more firms
use technology to deliver their products and services. Thus, Wal-Mart has an online