Cobalt: A Goblin in Our Midst?

Gateway passed up $53 million Friday, and no one's saying why.
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Pure Cobalt

The word "cobalt," the element that often combines with nickel and iron to form metallic alloys, comes from the German word for "goblin," which is a mischievous and sometimes evil elf or spirit. Well, it seems that just before

Cobalt Networks


completed its other-worldly IPO Friday -- it raised $110 million before its stock soared nearly sixfold -- some mischievous goblin robbed computer maker



of a $53 million paper profit.

Or could it be that the

Securities and Exchange Commission

, quietly and unbeknownst to public investors, snatched from Gateway the easy gain in IPO candy other companies have been enjoying lately?

Some explanation is in order. Cobalt Networks, yet another heretofore completely unknown technology company in Silicon Valley, makes "server appliances," or task-specific computers that focus on improving the performance of Web sites. Founded by veteran entrepreneur Gordon Campbell, Mountain View, Calif.-based Cobalt actually has been shipping products for more than a year (what took it so long to go public?) and recorded nearly $14 million in revenues in the first nine months of 1999. The company's unique selling point is that its servers are based on an open-source


software operating system, making them at once inexpensive and trendy.

In September, Cobalt signed a five-year supply agreement with a resurgent Gateway, which, after

Dell Computer

(DELL) - Get Report

, is the most successful direct manufacturer of PCs. Cobalt first filed to go public in early September, and its first filing with the SEC makes no mention of its subsequent supply agreement with Gateway. That arrangement shows up in later amendments and details how Gateway will sell Cobalt servers under the better-known company's brand name.

It isn't until Cobalt's third amendment, on Oct. 28, however, that another aspect to the Gateway-Cobalt relationship pops up. Underwriters

Goldman Sachs

, Cobalt discloses, have reserved 500,000 shares for Gateway, "which has expressed a nonbinding interest in purchasing these shares." That'd be an amount equal to 10% of the offering and twice the number of shares reserved for Cobalt's "friends and family," the web of suppliers, customers, employees and literally close contacts who get the opportunity to buy in at the IPO price.

Gateway's bounty appears again in amendment No. 4 on Thursday, the day before Cobalt went public. But mysteriously, mention of Gateway's allocation vanishes in a later amendment that day. And according to a Gateway spokesman, the San Diego-based company in fact didn't purchase the shares. "Both companies decided it would be better right now for Gateway to not make the investment," he says, adding that "we still have the option" to buy the shares.

Yeah, but you passed up on the opportunity to buy shares at 22 that finished their first day at 128 1/8. As noted, and just because it's fun to write the number again, that's $53 million.

The Gateway spokesman didn't elaborate on why the two companies thought it best that Gateway not invest now. Cobalt's outside lawyer, Robert Latta of

Wilson Sonsini Goodrich & Rosati

, as well as Cobalt Chief Financial Officer Kenton Chow and a Cobalt investor-relations spokesman, did not return phone calls. A Cobalt press spokeswoman testily repeated a few times that all information on the company is available in its SEC filings and that the company cannot comment until its "quiet period" is over.

So that leaves inquiring minds wondering. Could it be that the SEC viewed the Cobalt investment to be unseemly, seeing as Gateway was cut in just weeks before what obviously was becoming a hot IPO and just weeks after signing a reputation-enhancing supply deal with Cobalt?

And finally, a note to SEC Chairman

Arthur Levitt

: Could you explain one more time how it is that public investors are best served by being forced to divine such developments as a potential purchaser of 500,000 shares dropping out at the last minute when the company (prudently) won't comment? Wouldn't it be better to allow the company to explain such imponderables, as they most certainly would for an institutional investor who wants to know?

But then that would imply that the commission is paying careful attention to the IPO process instead of making piecemeal responses to criticism in the media.

Wanting to Play in the Sand (Hill Road) Box

There are only a few Silicon Valley venture-capital firms that qualify for the nosebleed division. This distinction is defined in two, and only two, ways: their "carry," or the percentage of profits the partners keep before distributing goodies to investors, and their "mindshare," or the extent to which the public associates them with their huge successes. The unparalleled king of fabled Sand Hill Road in Menlo Park, Calif., is

Kleiner Perkins Caufield & Byers

. Close behind are

Sequoia Capital


Benchmark Capital

. And in the running undoubtedly are

Accel Partners


Softbank Technology Partners

and older but still powerful funds like

New Enterprise Associates


Mayfield Fund

. It's cruel, but that's pretty much the end of the list.

The partners of newly constituted

Redpoint Ventures

hope to change that by announcing today that they've raised $600 million for Internet-oriented investments. The partners of Redpoint ditched their previous firms,

Institutional Venture Partners


Brentwood Associates

, to focus on what former Brentwood partner and current Redpoint partner Jeff Brody calls "Internet 2.0." Broadband plays, application service providers and event content companies will be a focus of Redpoint's, says Brody. He singles out digital television as a primary target. And according to Brody, Redpoint did convince investors to award its general partners 30% of the profits, the carry that qualifies for top-tier these days. Will Kleiner ask for 35% in its next fund?

See Ya in San Diego

Tech investors used to follow a dictum to "buy 'em at AEA and sell 'em at


." The buying time is the annual

American Electronics Association

financial conference in San Diego, and the selling time is the soon-to-be-swallowed-up investment bank's spring tech conference.

The conventional wisdom may be worthless, what with tech stocks flying high into the teeth of Y2K. But the AEA "classic," as the trade organization calls it, remains a fixture for professional tech-stock investors. It has lost some of its luster because the Internet isn't a big part of the show. But it's still the one time of year when competing research analysts, investment bankers and their many clients converge at the same venue. The format also is unusual: Companies make eight straight identical presentations with no breakout sessions.

I'll do my best to soak up the tech trends in San Diego from today through Wednesday and report back to you. So too will


chip reporter

Marcy Burstiner

and Editor-at-Large (we say Livin' Large) and Silicon Babylon columnist

Cory Johnson


Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

Edie Yates assisted with the reporting of this column.