Why you "have" to own COBT.....................FOCUS-Server appliance maker Cobalt rockets after IPO
(adds details, analyst comments, previous New York)
By Therese Poletti
SAN FRANCISCO, Nov 5 (Reuters) - Shares of Cobalt Networks Inc. (NASDAQ: COBT), the maker of a small, blue
server-in-a-box, soared almost 500 percent on Friday in its initial public offering, making it the third biggest initial public offering
ever.
The Mountain View, Calif.-based company develops low-cost, compact server appliances for running Web sites and e-mail
that are easy to install. Cobalt servers, one which is called Qube, also run the Linux operating system, the free upstart operating
system that competes with Microsoft Corp.'s (NASDAQ: MSFT) Windows NT.
"They've got all the magic words between appliances and Linux, but there is also some meat behind this. It's not just smoke and
mirrors, it's a real business," said Irv DeGraw, research director at WorldFinanceNet.com. "We're seeing more and more of
these companies moving away from ephemeral dot.com businesses and getting into real businesses."
The 4-year-old company raised $110 million after offering 5 million shares and now has a staggering market capitalization of
almost $4 billion, based on 31 million shares outstanding (including shares set aside for options, etc.). In the first six months of
1999, Cobalt had $7.7 million in revenues and an operating loss of $8.2 million.
Goldman Sachs & Co. was its lead underwriter. The strong demand for Cobalt's IPO was evident even before trading began.
The price range for the deal was raised to $20-$22 from $14-16 when it was priced on Thursday.
Cobalt's offering ranks third among the hottest IPOs ever, behind No. 1, theglobe.com (NASDAQ: TGLO), which soared 606
percent in its first day of trading and Foundry Networks Inc., (NASDAQ: FDRY) which jumped 525 percent.
Cobalt, which skyrocketed 482 percent, pushed out Marketwatch.com Inc. (NASDAQ: MKTW) as the No. 3 biggest gainer
in its debut, according to Thomson Financial Securities Data. MarketWatch.com surged 474 percent in its first trading day and
Sycamore Networks Inc. (NASDAQ: SCMR) climbed 386 percent last week.
Because Cobalt is the second company to go public in the Linux space, many investors were attracted to the offering, after the
stunning IPO of Red Hat Inc. (NASDAQ: RHAT), the biggest distributor of Linux, in August.
"I think investors are viewing it as Red Hat 2.0," said Carl Howe, research director at Forrester Research in Cambrdige, Mass.
"They have a very clean story and a good buzz about them."
Cobalt does not compete with Red Hat in the Linux area and in fact, the company includes Red Hat Linux on its servers, which
are designed around low-cost processors from MIPS Technologies Inc. (NASDAQ: MIPS) or Advanced Micro Devices Inc.
(NYSE: AMD).
The company has sold over 11,000 appliances to more than 1,000 customers in more than 60 countries and targets small to
medium-sized businesses, education or government users.
Currently, the market for the so-called one-task server appliance market is small, according to Forrester. These servers are
dedicated to performing one function, such as running a Web site, or e-mail. Forrester estimates the market at $92 million this
year and growing to $550 million in 2002.
Cobalt does not have many direct competitors yet in the server appliance market, but Howe said that he believes many of the
general purpose server makers are looking at developing smaller, low-cost appliances.
The general purpose server makers include Compaq Computer Corp. (NYSE: CPQ), Dell Computer Corp. (NASDAQ:
DELL), Hewlett-Packard Co. (NYSE: HWP), International Business Machiness Corp. (NYSE: IBM) and Sun Microsystems
Inc. (NASDAQ: SUNW).
"This has not escaped the notice of Dell, IBM and everyone else," Howe said. "We think you will see a whole wave of
appliances this year. We think they have a lot of growth."
IBM recently acquired Whistle Communications, a server appliance company, and it is now offering a low-cost subscription
based service for small businesses providing Internet links for up to 100 employees for $99 a month.
Cobalt also has a product in the network storage area, where it competes with companies like Hopkinton, Mass.-based EMC
Corp. (NYSE: EMC) and Network Appliance Inc. (NASDAQ: NTAP) of Sunnyvale, Calif.
The company was co-founded by Gordon Campbell, a well-known Silicon Valley entrepreneur, who has started up two other
successful semiconductor companies, Chips and Technologies (now owned by Intel Corp. (NASDAQ: INTC)) and 3Dfx
Interactive Inc. (NASDAQ: TDFX), a graphics chip company.
Campbell and other top Cobalt executives will see a huge financial windfall from the IPO. Campbell personally owns about 2.4
million shares of Cobalt, or an 11.1 percent stake in the company, according to the company's prospectus.
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