John:
Re: Very nice & positive front page article in today's WSJ about the history of NASDAQ, and Intel. I get the hard copy, if someone subscribes to WSJ Interactive, and would post the article here, it would be interesting and pleasant reading for Intel investors.
Here's the article (long, but interesting):
interactive.wsj.com
A Close Above 3000 Marks Triumph Of Nasdaq Market, High-Tech Shares
By DAVID P. HAMILTON and TERZAH EWING
Staff Reporters of THE WALL STREET JOURNAL
On Feb. 8, 1971, a team of technicians for the first time activated a nationwide computerized quotation service for stock prices. Eight months later, the shares of a fledgling Silicon Valley chip company started flickering across the screens of that quotation system.
It wasn't much more than a coincidence at the time. But for the Nasdaq Stock Market and Intel Corp., it was the beginning of an all-but-inseparable relationship, one that would eventually set the pace for much of the rest of the high-tech industry.
That was certainly the case Wednesday, when a surge of enthusiasm for technology stocks overpowered interest-rate fears to push the Nasdaq composite index past the 3000 mark to a record close of 3028.51. Intel, which accounts for 7.4% of the index's capitalization, played a big role; its shares rose $2.3125 to close at $79.75. In after-hours trading, Intel's share price didn't change.
The Nasdaq market, of course, is home to many of the top U.S. high-tech companies, from triumphant behemoths such as Microsoft Corp. and MCI WorldCom Inc. to a much-hyped crop of "dot-com" start-ups. That emphasis reflects the fact that initially, Nasdaq was the only place for risky and often unprofitable tech companies. Over time, the market has both fueled the high-tech boom and been fueled by it. Without the easy access to capital made possible by Nasdaq -- once known as the over-the-counter market -- many in Silicon Valley argue that the high-tech boom itself would have been much slower in coming, or might not have happened at all.
The Nasdaq composite index is now up 2928.51% since its inception. By contrast, the Dow Jones Industrial Average is up 1107.18% over the same period. During the 1990s, the Nasdaq index has risen 566%, compared with the Dow's 285% rise. And the index's increase has accelerated: It took 14 years, until 1995, to pass 1000, three more years to hit 2000 last year -- and then just one more year to reach Wednesday's level.
In 1994, the Nasdaq market, whose parent is the National Association of Securities Dealers, surpassed its chief rival, the New York Stock Exchange, in annual trading volume, with 74.35 billion shares to the NYSE's 73.42 billion (Nasdaq often generates more trades because of its system of multiple dealers). Though some still think of it as an exchange for small stocks, Nasdaq is home to three of the world's five largest companies measured by market capitalization. All three, not coincidentally, are high-tech concerns: Microsoft, Intel and Cisco Systems Inc.
Symbiotic Relationship
But it is Intel, king of the personal-computer microprocessor, that established the high-tech industry's symbiotic relationship with Nasdaq. Its executives have spurned frequent and often aggressive entreaties to move its shares to the Big Board -- even resisting the lure of a much-coveted single-letter stock symbol, "I", that the Big Board acknowledges it has reserved (though it won't specify for whom). Just this week, Intel and Microsoft joined the Dow Jones Industrial Average, the first time Nasdaq-listed companies have been included in the index.
In sticking with Nasdaq, Intel set a precedent for other high-tech firms. Those companies, many of them established by Intel's own alumni, came to see listing on Nasdaq, and staying put, as a fact of life so obvious that questioning it can elicit blank stares.
"It's kind of a natural progression," says Chuck Haas, a former Intel executive who is now vice president of Covad Communications Group Inc., a highflying communications start-up that listed on Nasdaq last January. "Your parents' heritage is where you tend to go."
The parallel rise of Intel and Nasdaq is the story of two institutions that have struggled for respect, often against tenacious opposition, as the high-tech industry has evolved from an enclave of engineers to a powerhouse of the global economy. Both have enjoyed staggering growth, punctuated by growing pains and occasionally serious setbacks, from Intel's 1994 public-relations fiasco with a bug in its Pentium microprocessor to Nasdaq's brush with charges of dealer price-fixing.
Back in 1971, Intel was a modest maker of memory chips, which hold data, and it had just weathered one of the sharp recessions that periodically swept through the chip industry. Its main product, the 1103 dynamic-random-access memory chip, used 4,000 transistors to hold what at the time was considered a staggering one-kilobit of information (The most commonly used chip today has 64,000 times the capacity.) Intel also had just produced the world's first microprocessor, which performs calculations; called the 4004, it was barely more than a curiosity.
The recently unveiled Nasdaq, meanwhile, wasn't even a stock market, just a system that allowed securities dealers to electronically track the prices of OTC securities. The Big Board scarcely noticed it. Nasdaq's immediate precursor had been a system of so-called Pink Sheets, lists of the previous day's over-the-counter stock prices that circulated among traders. Until Nasdaq computerized the distribution of prices, dealers had to call around for current prices, ever-suspicious that someone else might be holding out.
"You never knew if you were getting the best price, either as a buyer or a seller," says Arthur Rock, a San Francisco venture capitalist and Intel's first chairman. "I don't know if you'd call it the Wild West, but it certainly wasn't organized, and it certainly wasn't efficient."
The Nasdaq system changed all that. Building it hadn't been easy; Ma Bell was still the only game in town for telecommunications, leading to long waits for new telephone lines. Nasdaq had to hire a contractor called Bunker Ramo Corp. to build a data center for the service and to oversee the stringing of data lines to the securities companies that would receive the information.
Intel executives, however, were captivated by the new system, which struck them as an intuitively obvious way to handle trading. "We were intrigued by the way it was computerized," says Gordon Moore, one of Intel's cofounders and now chairman emeritus. "That was what Nasdaq had going for it."
Despite the expense of building new semiconductor factories, Intel was rarely strapped. Still, its IPO on Oct. 13, 1971, was a major step -- not just for the $8.2 million it raised, but because it assigned value to the shares and stock options held by Intel's investors and employees. Intel was in the vanguard of a Silicon Valley trend toward using stock options to motivate employees, a practice that quickly spread across the fledgling chip and computer industries. In the process, it tied their fortunes even more tightly to the stock market.
As other high-tech firms started to follow Intel onto Nasdaq, such enterprising practices drew the attention of Gordon Macklin, Nasdaq's first president and a man often considered the father of the market. A genial former investment banker, Mr. Macklin was neither a relentless schmoozer nor much of a visionary. But he did have a knack for sensing opportunities for the embryonic Nasdaq, and the emerging technology industry represented an important one.
Recognizing that it was natural for fast-growing companies in new fields to initially focus on growth instead of profitability, Nasdaq from the beginning allowed firms to list their shares without first achieving profits. That alone was a groundbreaking step at a time when the NYSE still had much higher standards, and indeed didn't allow IPOs at all.
"I used to think of the people in our market as the opposites of those people who wanted the prestige and theater tickets that came with exchange listings," Mr. Macklin says now. "They were the Marlboro Men of listings."
Still, many established firms found both Nasdaq and upstart companies in fields ranging from electronics to biotechnology difficult to take seriously. That started to change in the early 1980s, thanks to a series of fortuitous but largely unrelated events.
For Intel, the turning point started in 1981, when International Business Machines Corp. formally selected an Intel microprocessor to power its first PC. While that win was a big victory for Intel over archrival Motorola Inc., against whom Intel was waging a sales offensive known as "Operation Crush," the PC market was still tiny. Memory chips were still Intel's main business.
But not for long. By the mid-1980s, Japanese semiconductor makers were routinely turning out memory chips of much higher quality for lower prices than Intel. The company plunged into the red and panic started to spread through its ranks. It was a period that Andrew Grove, Intel's current chairman, would later refer to as "wandering in the valley of death."
In his book "Only the Paranoid Survive," Mr. Grove recalls talking with Mr. Moore in mid-1985, idly discussing what a new CEO would do if the board were to replace the two of them. When Mr. Moore, then chairman, answered that new management would close down the memory business, Mr. Grove replied: "Why shouldn't you and I walk out the door, come back and do it ourselves?"
It took them a full year, but in the end, that's exactly what they did. At roughly the same time, PC "cloners" such as Compaq Computer Corp. broke IBM's technological control of the PC. Suddenly and surprisingly, Intel and its software partner Microsoft were the dominant powers in the rapidly growing PC market.
Nasdaq's transition was nowhere near as traumatic. In 1982, in response to new rules from the Securities and Exchange Commission, Nasdaq upgraded itself from a mere quotation system to a fully electronic stock market, regrouping its top companies under the new Nasdaq National Market. For the first time, Nasdaq could achieve something close to parity with the Big Board.
Not that there weren't glitches. Mr. Rock, the Intel founding chairman, says he initially objected to Mr. Macklin's plan to make Intel one of the first companies to move over to the new national market. Together with Mr. Moore, Mr. Rock made his case to the Nasdaq president during lunch at the Bankers' Club in San Francisco's Bank of America building.
"I just didn't know what would happen, and wanted to know why couldn't we be second," Mr. Rock says. "I just hate to be first in anything." But Mr. Macklin insisted, and Mr. Rock says he had no choice but to accede.
Mr. Macklin recalls the conversation somewhat differently: He says Mr. Rock was concerned about trading liquidity on the national market. Mr. Macklin laid those fears to rest. In any case, the transition went smoothly.
Join the Discussion: What do you think is responsible for the volatility of technology stocks? What influence do you think they have on the rest of the market?
Meantime, the Big Board was taking notice of the competition. In 1984, the NYSE relaxed its stringent rules to permit IPOs on the exchange for the first time. "There was a realization that we were missing out on the opportunity to list some truly great companies," says Robert Zito, a senior vice president of the New York exchange. "If in the late '70s and early '80s our IPO program had been in place, some of those great names would be trading on the NYSE."
The Big Board also stepped up its attempts to woo new high-tech stars such as Intel. Intel Treasurer Arvind Sodhani, who also serves on the board of the NASD, characterizes those efforts as "frequent and persistent," but declines to describe them further. A Big Board spokesman says the exchange won't comment on specific conversations with companies.
But Intel wasn't interested in moving. Its officials thought the computerized Nasdaq offered their stock higher liquidity and more efficient trading. Many Silicon Valley executives were also put off by the Big Board's main draw: prestige. "The NYSE long treated high-tech companies with what best might be called benign neglect, and continually delivered the message that we were unworthy of being listed," says Bill Davidow, a former Intel official and now a venture capitalist.
(Whatever its past attitude toward technology companies, the Big Board today lavishes attention on them.)
What's more, Intel officials, who would readily bet the company's future on each new generation of chip, balked at what they considered the high cost and overly restrictive requirements of the NYSE. Chief among their complaints was a Big Board rule that made it all but impossible for a listed company to leave the exchange; that rule is still in place, although it was loosened earlier this year so that companies that want to delist only need the approval of their boards, rather than a full shareholder vote. And because the New York exchange would funnel all trades of Intel shares through a single exchange dealer known as a specialist, Mr. Rock rejected the notion of locking Intel into something he feared might not be in its best interest.
"I said that's very good, but we ain't buying," Mr. Rock says. "We said, we don't want to spend the money to list. If we do get a specialist who isn't any good, then we can't delist. So to hell with them."
To be sure, the Big Board hasn't lost cachet, even with Nasdaq's gains in reputation. The NYSE has 3,066 listed companies, vs. Nasdaq's 4,845, but the total market value of NYSE-listed firms is $11.7 trillion, vs. $3.36 trillion for Nasdaq-listed companies. Last year, 71 companies abandoned Nasdaq for the Big Board; another 38 jumped this year.
And not every high-tech company has remained as loyal to Nasdaq as Intel. The chip maker's chief rival, perennial runner-up Advanced Micro Devices Inc., moved to the Big Board in 1979. An AMD spokesman acknowledges that, "There was some prestige attached to being listed on the Big Board as opposed to over-the-counter." Likewise, Compaq moved to the New York exchange in 1985, a year after listing on Nasdaq. In 1996, America Online Inc. made the jump.
But such defections scarcely slowed Nasdaq's momentum, either in the U.S. or overseas. In 1986, the London Stock Exchange adopted a system similar to Nasdaq, the Stock Exchange Automated Quotations system, known as SEAQ. Other foreign systems with notably imitative names, such as Easdaq in Europe, Sesdaq in Singapore and Jasdaq in Japan, have since sprouted up. Nasdaq itself has a deal with Softbank Corp. to start up Nasdaq Japan, and this week may announce a similar plan for a Nasdaq Europe.
As their fortunes soared, both Intel and Nasdaq decided it was time for a higher profile. Intel offered subsidies to PC makers to put an "Intel Inside" sticker on their products, and it advertised heavily on television, one of the first times a chip maker had ever tried to establish an identity with the general public. Nasdaq, meanwhile, billed itself as "the market for the next 100 years," and endeared itself to its largest listed firms by running ads profiling several of them.
That greater visibility, however, made it far easier for minor problems to mushroom into disasters. And in 1994, both Intel and the Nasdaq found themselves caught up in public-relations crises exacerbated by their newly established positions in the world of business.
Two university professors studying what they considered a surprisingly large gap on the Nasdaq between bid and ask prices -- otherwise known as the "spread" -- published a research paper that suggested "collusion" among the market's dealers as a possible cause. The biggest Nasdaq trading firms were soon embroiled in charges of price-fixing and faced shareholder lawsuits, but continued to insist nothing was wrong.
Only after a two-year Justice Department investigation did the firms back down. They settled the class-action lawsuit for $1.03 billion, and the market instituted SEC-mandated trading reforms that narrowed spreads.
In Intel's case, a mathematician discovered that an arcane flaw in the company's Pentium chip caused it to yield incorrect results in certain rare instances. Officials from Mr. Grove on down explained again and again that the flaw would affect only a tiny fraction of users, and refused to recall the chip or to replace it unless customers could demonstrate a need. Ridiculed on late-night television and battered by critics on the Internet, the company was eventually forced to offer replacement chips to anyone who asked for one.
Intel and Nasdaq both managed to surmount their crises, and again appear to be in top form. Nothing lasts forever, though, and both institutions now face a common challenge: the Internet.
New electronic alternative trading systems, growing in popularity because of the Internet, are challenging Nasdaq; such systems now account for about 28% of Nasdaq's trading volume. Many of these systems, which match customer orders electronically and thus bypass dealers, trade or plan to trade Nasdaq stocks after regular hours. Some have filed to become exchanges, which would allow them to compete with the Big Board as well.
Intel, meanwhile, suddenly faces the possibility that the PC may no longer dominate computing, and that its chips won't necessarily be needed in all computers. Again, this is thanks largely to the Internet, which makes it easier for users of a variety of hand-held devices, set-top boxes and other gadgets to access information and communicate. Because many of those devices aren't based on the PC, Intel's position is far from assured.
Whether or not Intel and Nasdaq are successful in meeting the new tests posed by the Internet -- and both say they will be -- they must clearly adapt to a world in which they are no longer scrappy underdogs, but titans in their own right who must fend off challengers.
"We're at a different stage of life," says Alfred R. Berkeley, Nasdaq's president. "We're a big company that has its own set of transformative issues."
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