3-Sun to buy Cobalt in $2 billion stock deal
(Recasts lead, adds analyst comment and details throughout
and changes byline)
By Nicole Volpe
NEW YORK, Sept 19 (Reuters) - Sun Microsystems Inc.
<SUNW.O>, the biggest maker of computers that serve up Web
pages, said Tuesday it would buy Cobalt Networks Inc. <COBT.O>,
in a $2 billion stock deal.
Cobalt, which makes computer devices used for specific Web
tasks such as data storage or e-mail, would broaden Sun's
product line of powerful and expensive computers to include the
simpler, low-cost server appliances.
Cobalt, which was one of Nasdaq's hottest initial public
offerings last year, has the highest share market for server
appliances, which are often used by small- and medium-sized
businesses and Web service providers.
"This is a golden opportunity for us to extend our business
down to the service provider market," said President and Chief
Operating Officer Ed Zander during a conference call with
reporters and analysts. "We like the fact that Sun can be in
more places now."
Sun shares rose to $1-3/4 to $117. Cobalt shares were one
of the top percentages gainers on Nasdaq, up $15-7/8, or 38
percent, at $56-7/8. That was well off Cobalt's record high of
$172.
"We think this (deal) makes sense because, potentially,
server appliances could cannibalize some of (Sun's) sales,
therefore it is better for Sun to incorporate it into its
approach," said Merrill Lynch analyst Steven Milunovich.
Zander said the deal fortified Sun's lead in providing
servers by covering the low-cost part of the market for eyed by
Dell Computer Corp. <DELL.O> and Compaq Computer Corp. <CPQ.N>
"Dell and Compaq have talked about getting into the low-end
space," he said. "This deal really impacts those companies who
thought they could get into the low-end space to come up
against Sun."
The purchase comes just 10 months after Cobalt's
spectacular launch on the Nasdaq market. Cobalt soared almost
500 percent in its November initial public offering, hitting
more than $128.
Under the terms of the deal, each share of Cobalt common
stock will be converted into 0.5 Sun share, with a total
purchase price of about $2 billion, the statement said.
Cobalt posted a second-quarter net loss of $6 million, or
21 cents a share, on $16.2 million in net revenues. The
Mountain View,, Calif.-based company has about 300 employees
and some 4,000 customers worldwide.
The chairman of four-year-old Cobalt is Gordon Campbell,
who had founded two successful Silicon Valley computer
chipmakers previously.
Sun said the acquisition would be accounted for as a
purchase. It is expected to be completed during Sun's second
quarter of fiscal 2001, which ends Dec. 31.
Sun expected the deal would add to earnings before
interest, taxes, depreciation and amortization, gains on the
sale of equity investments and in-process research and
development charges for the second half of the fiscal year.
Cobalt servers run the Linux operating system, the free
upstart operating system that competes with Microsoft Corp.'s
<MSFT.O> Windows NT. Sun has so far not embraced Linux for use
throughout its product line.
The deal, seen as an endorsement by Sun of the Linux model
of computing using various less-powerful appliances in tandem
rather than a single powerful computer, boosted shares in Linux
companies.
"Cobalt is the largest Linux server appliance company out
there," said WR hambrecht analyst Prakesh Patel. "Sun has
always pushed buying more powerful computers, running its own
operating system."
Linux software distributor VA Linux Systems Inc. <LNUX.O>
rose $8-7/8 to $53 and Red Hat Inc. <RHAT.O> rose $1-11/16 to
$20-13/16.
Sun has not committed itself to make all of its products
Linux-ready, as have some of its rivals such as International
Business Machines Corp. <IBM.N>
Zander said in a conference call with analysts and
reporters the acquisition did not reflect a new Linux strategy.
"We did not approach Cobalt with the word Linux written on
our foreheads," he said.
((--New York Newsdesk (212) 859-1700))
REUTERS
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