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Sun Buys Cobalt

Written By: R. Krause
Published On: September 29 2000

Sun Buys Cobalt
R. Krause - September 29, 2000

Event Summary

September 19, 2000 - Sun Microsystems, Inc. has said it will acquire Cobalt Networks in a stock-swap deal valued at roughly $2 Billion. Sun is a leading manufacturer of Unix-based computers, while Cobalt is a leading manufacturer of computers known as "server appliances". Server appliances are specialized variations of the servers commonly used as enterprise computing systems in a number of companies. Appliances focus on performing specific tasks, such as Web caching, and avoid the computing "overhead" required to be a general-purpose computer.

Under the terms of the deal, Cobalt shareholders will swap each of their shares for 0.5 shares of Sun stock. The acquisition is expected to be completed during Sun's second quarter of fiscal 2001, which ends December 31, 2000, subject to governmental approvals, Cobalt shareholder approval, and customary closing conditions.

Current Cobalt products will be sold by Sun's sales force, after the acquisition is complete.

Market Impact

Positives: This is generally a winner for both Sun and Cobalt. Sun breaks into the server appliance market quickly, without expending the time and effort to develop its own product(s). Sun also gets a credible Linux hardware offering, without having to call the spin doctors to explain away the previous anti-Linux statements. Cobalt gets a stable parent, the ability to absorb the (hopefully) short-term losses associated with start-up companies, and a large sales force. From a forward-looking business standpoint, we feel this deal is a good thing, and we believe both the consumers and the two companies will benefit from the acquisition.

Not-so-positives: These fall into the coulda/woulda/shoulda space. As strong a company as Sun is (and has been) in the server and Internet spaces, we are a little amazed that (a) it took them this long to get into the server appliance market, and (b) they didn't develop an appliance themselves. Appliances have been around for a couple of years, and the growth trend has been there for at least a year - if Sun were going to buy an appliance manufacturer, they should have done so in May, when Cobalt's stock was at/near its 52-week low. This could have saved $350M-$400M. If Sun had chosen to develop an appliance line, it should only have taken them nine-twelve months to develop their first product, and if they had more than one hardware development team, they could have increased the number of offerings.

Summary: We feel the positives are substantial, and most of the "not-so-positives" are hindsight-based rantings. We expect Sun to reap significant rewards from this acquisition.

User Recommendations

Present Cobalt customers should see little, if any, effect. Customers considering Cobalt, but wary of their long-term viability, should be reassured.

Sun customers wanting server appliances should be mollified a bit, but should still ensure that integrating a Linux machine into a Solaris environment will not cause problems.

Users planning to purchase server appliances should continue to include Cobalt/Sun products on their "short list". (This does not apply to users only willing to consider Windows NT/2000, of course).

 
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