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To: Night Writer who wrote (84813)	9/19/2000 5:58:00 PM
From: Night Writer	Read Replies (3) \| Respond to of 97611

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 * end of story *