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Lack of Big Three Support Leaves Cobalt Group Feeling Blue

The B2B concern has signed up thousands of car dealers but is still missing the big sponsorship that investors demand.

As far as business-to-business e-commerce plays go, the

Cobalt Group

(CBLT)

would seem to have it all.

It targets a fragmented industry, claims a significant first-mover advantage, and counts twice as many customers as its nearest competitor. Throw an exclusive endorsement from the industry's trade group into that mix, and you've got all the makings of a B2B natural. Why, then, does Cobalt's stock trade at 12 1/2, or just 4.5 times revenue?

The answer lies at the heart of what it takes to achieve B2B success. Cobalt provides Web and e-commerce services to individual auto dealerships, a target market that includes more than 22,000 businesses. But, while Cobalt already serves dealerships for 12 of the 20 manufacturers selling in the U.S., it hasn't been able to land the really big kahuna: The

General Motors

(GM) - Get Report

,

Ford

(F) - Get Report

or

DaimlerChrysler

(DCX)

that would send its stock soaring.

Cobalt's story suggests that while new B2B ventures crop up daily, most won't succeed without major industry support. And because there is usually only a handful of dominant players in any industry, there is frightfully little of that support to go around.

Doing It Right

The Cobalt Group, by many accounts, did nearly everything right. Founded in 1995, it soon started bringing the nation's individual auto dealerships online. In a business that epitomizes the very idea of the middleman -- and hence sees the Internet as its enemy, Cobalt developed a reputation for introducing dealers to the Web without scaring them.

It has now developed more than 5,200 Web sites for individual dealers, and offers e-commerce services to twice as many. In April 1999, it acquired

PartsVoice

, an automated parts locator, which works both over the Internet and via phone -- an important distinction for Internet-lacking body shops and service stations. And it has the endorsement of the

National Automobile Dealers Association

, for which it is developing a consumer portal to compete against sites such as

Autobytel

(ABTL)

TST Recommends

and

Carsdirect.com

.

In January of this year, it introduced

MotorPlace.com

, a vertical B2B portal for the auto dealership industry. John Holt, Cobalt's CEO and co-founder, points out that $500 billion flows through dealers' hands each year for everything from autos to toilet paper to motor oil. His portal aims to streamline that spending, while getting a piece of the savings.

Perhaps more importantly, though, Cobalt sees MotorPlace as an exchange for dealers to unload excess inventory. That's important because dealers typically can't sell 20% of the parts, which they order and pay for upfront from their manufacturers.

More Zero Than 60

But while Cobalt's business plan sounds like a roadmap for success, its stock hasn't gone from zero to 60, at all. After an unremarkable IPO last August when it was priced at 11, Cobalt's stock wavered in the single digits until January. That's when it unveiled its plans for MotorPlace, and its stock traded as high as 34.

But Cobalt couldn't get the B2B image to stick. When the Big Three automakers announced in February that they would launch their own B2B exchange, investors thrashed Cobalt's stock.

"It's absolutely ludicrous," says CEO Holt. "The Big Three are going to form an exchange...way up the supply chain, and Cobalt's stock gets hit. It has nothing to do with the dealerships. I guess it just shows the depth of understanding in the market today."

But it also shows that none of those Big Three has tapped Cobalt for those dealers, either.

"While they've got exclusivity with 30% of the industry, they've got none of the Big Three," says Jordan Hymowitz, an analyst with

Robertson Stephens

who rates the stock a buy and has a price target of 50. His firm was the lead underwriter on Cobalt's IPO.

All Tied Up

Further complicating Cobalt's need for a Big Three customer is the fact that Ford already has chosen someone else. Earlier this month, Ford announced it would form a company to perform Web services for its 5,000 dealers. It tapped

Trilogy Software

, and not Cobalt, to help it with the job.

That leaves just GM and DaimlerChrysler, and analysts don't expect GM to make a decision on anyone soon. This further narrows Cobalt's options to only one.

"If they landed DaimlerChrysler, that's a home run. That's game over in my mind," says Hymowitz. "That would give them roughly half the market."

But that's no more of a reality than the shiny red car every high school kid dreams of for his 16th birthday -- and usually doesn't get.

"In this space, the focus needs to be on the information, and a company like Cobalt is eventually going to help the dealerships maintain a more consistent relationship with their customers," says Rob Leathern, an analyst with

Jupiter Communications

. "But until a major manufacturer comes out and says it wants someone like Cobalt Group to manage their dealership needs, people are going to be wary of a company like this."

In other words, Cobalt Group, and other B2B start-ups like it, face the incredibly frustrating possibility of always being one deal away from success.