Why Cisco got the Dow-index slot over other tech ideas

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For a little extra excitement, Silicon Valley might have preferred to see Google Inc. or Apple Inc. join the Dow Jones industrial average. But Dow Jones & Co.’s choice of Cisco Systems Inc. at least shows that it was on the same new-economy page -- and that it was listening to investors’ ideas.

Cisco, the leading supplier of computer networking equipment, was picked today to replace General Motors Corp. in the 30-stock Dow after GM filed for bankruptcy protection.

In the blogosphere, speculation about a replacement for GM has been a hot topic over the last few months, as it became apparent that the automaker was headed for a Chapter 11 filing.

Google and Apple might have seemed to be likely candidates to join Hewlett-Packard Co., IBM Corp., Intel Corp. and Microsoft Corp. in the Dow’s tech subgroup, but both had one big strike against them: their high share prices.

Because the Dow is a price-weighted index, the costliest shares have the greatest effect on the Dow’s day-to-day movements. Google, at $426 a share, is just far too pricey to include in the index, said John Prestbo, executive director of Dow Jones Indexes.

‘We don’t want one company being outsized’ in its influence, he said.

Even Apple, about $139 a share, would have been by far the highest-priced stock in the index if Dow Jones had picked it. IBM currently is the Dow’s costliest stock, at about $108.

Cisco, which rose $1 to $19.50 today, didn’t present a price issue. And Prestbo said Dow Jones liked the idea of replacing a company that makes vehicles for concrete highways with one that makes ‘the paving bricks for the information highway.’ Corny, maybe, but the logic works.

As for the stock-replacement ideas circulating on the Web, Prestbo said Dow Jones took it all seriously.

‘We pay attention to public reaction very closely,’ he said.

But the second new Dow stock announced today -- insurance giant Travelers Cos., which will replace the now partly government-owned Citigroup Inc. -- wasn’t high on a lot of lists.

Many Dow-watchers thought that Goldman Sachs Group or Wells Fargo & Co. would be good bets to replace Citi in the venerable index.

Prestbo, however, said Dow Jones wanted an insurance company to make up for the loss of American International Group Inc., which was booted last fall after its government rescue.

The replacement for AIG at the time was Kraft Foods Inc., rather than another financial stock, because Dow Jones understandably didn’t want to risk picking another financial company during the sector’s fall meltdown.

-- Tom Petruno