Ravenous investors looking for the next Linux-related initial public offering may not have to wait for VA Linux Systems.
Cobalt Networks, a manufacturer of
single-purpose "server appliances" based on the Linux operating system, plans to raise as much as $86 million in an IPO, based on its
filing fee with the Securities and Exchange
Commission. Goldman Sachs, Merrill Lynch, and BancBoston Robertson
Stephens are listed as underwriters of the IPO.
Cobalt's IPO filing puts the company a step ahead of VA Linux,
another manufacturer of Linux computers. VA's chief executive, Larry
Augustin, predicted in August
that his company would be the second Linux IPO after software seller Red Hat.
Red Hat's IPO a month ago ignited a trading frenzy that has driven the stock ever higher. The company's founder, chief
executive, and lead investor have all become paper billionaires. In
mid-day trading today, it had reached an all-time high of $123; its IPO price was $14.
Not all Linux companies are so eager to tap investor enthusiasm for the upstart OS. Linuxcare, a provider of Linux
technical support and training services, has said it will conclude a round of corporate
financing before it goes public.
Cobalt, based in Mountain View, California, is one of the smaller players
in the server appliance market, which has attracted huge companies such as
IBM, Sun Microsystems, Compaq Computer, Hewlett-Packard, and Dell Computer.
Server appliances are designed to be easy to install, use, and administer.
Analysts say they're likely to grow in popularity as more companies tap
into the networked world of the Internet. While some are multipurpose
machines, most server appliances are designed to do one job well, such as
hosting email operations, serving Web pages, or storing data on a network.
"In the market for server appliances, we face significant competition from larger companies who market general and/or limited purpose servers and have
greater financial resources and name recognition than we do," Cobalt
Not yet profitable
Since its founding in 1996, Cobalt has sold more than 11,000 computers, the
company said. Cobalt still isn't profitable, however.
In 1998, the company had revenues of $3.5 million and net losses of $10.5
million. In the six months ending July 2, 1999, the company increased its revenues to $7.6 million but still lost $8.2 million.
Cobalt sells two major product lines, the Qube and the RaQ, but in April it added newer
Using Linux as the OS offers Cobalt two clear benefits. The company can "leverage
the rapid application development cycles of the open-source software
community" to cut down on the time it takes to bring new products to market, Cobalt said in the filing.
Additionally, because Linux programming instructions are freely available, the OS can be customized, the company said. Cobalt licensed "for a nominal price" a
modified version of Red Hat's Linux product.
Relying on Linux also poses some risks. "We may not succeed if Linux fragments, and application developers do not develop software for our products," Cobalt said.
The company is led by chief executive Stephen DeWitt, 33; chief technology
officer and co-founder Vivek Mehra, 35; chief operating officer Gary
Martell, 36; and co-founder and board chairman Gordon Campbell, 55.
The company had 101 employees as of July 2, 34 of whom are involved in
research and development.
A cluttered market
The server appliance market is cluttered, with different companies targeting different areas. Among the smaller players competing with Cobalt are Encanto
Networks, Auspex, Network Appliance, TechNauts, Mirapoint, and CacheFlow. Intel also
is emerging in the server appliance market, analysts have said, and SGI is
hoping its high-end systems will be good server appliances for sending
streams of audio and video information across the Internet.
In addition, there has been a spate of partnerships and acquisitions in the market: IBM
purchased Whistle Communications and licensed technology from Network
Engines; Compaq and Dell licensed a specialized operating system from
Novell; Dell is selling Network Appliance storage servers under the Dell name,
Quantum acquired Meridian Data; and database giant Oracle joined with
Dell, Compaq, and HP for its "Raw Iron" project.
While server appliances can get very expensive, costing tens of thousands
of dollars, Cobalt's are relatively inexpensive, with prices beginning at less
Cobalt wants to enter into original equipment manufacturing (OEM) deals in
which other companies would sell Cobalt equipment under their own names,
the company said.
The $86 million that the company hopes to raise is only an approximation used to calculate the fee the company paid to the SEC. The company hasn't yet said how many shares it wants to sell or its expected price range.
The company proposes to trade on the Nasdaq market under the ticker symbol