SEATTLE POST-INTELLIGENCER
Cobalt Group joins drive to go private Stock jumps after largest shareholder makes offer Tuesday, June 5, 2001

By JOHN COOK

SEATTLE POST-INTELLIGENCER REPORTER

The Cobalt Group is waving goodbye to Nasdaq.

After 22 months on the stock exchange, the Seattle Internet company yesterday announced that its largest shareholder -- private equity firm Warburg Pincus -- has agreed to purchase the outstanding shares at a 79 percent premium to Friday's closing stock price.

As a result of the buyout, The Cobalt Group will become privately held by Warburg Pincus and other shareholders. The deal, endorsed by the Cobalt board of directors, is subject to shareholder approval at a meeting to be held in September.

Shareholders would receive $3.50 for every share they own, a sweetheart deal depending upon when one purchased stock in the company. The Cobalt Group, which provides Internet tools and services to automobile dealers and manufacturers, went public at $11 in August 1999 and hit a high of $24.13 five months later. But it has traded below $3 for the past 2 1/2 months and closed Friday at $1.95. Yesterday, shares surged 73 percent on the news to close at $3.38.

"Taking a company like this private is a major vote of confidence in its future," said Tim Miller, president of Webmergers.com, a San Francisco-based firm that analyzes mergers and acquisitions. "It is worth more to the owners as a privately held company which they can spruce up, clean up, refinance, recapitalize and bring back to the market when it is ready for it. I think it is a bullish note."

Miller also said it is just a matter of time before other battered Internet companies follow The Cobalt Group's lead.

"So many of these Internet companies are valued so low, even in some cases below their cash, that it makes a great deal of sense for owners or investors to take them private," he said.

Sanford Robertson, founder of Francisco Partners, a $2.5 billion investment and buyout firm, agrees that the trend will continue. But he said it is more common for software or semiconductor companies with established track records and earnings than for money-losing Internet companies. Yet, he said, "I think we are going to see a lot more of this as technology companies come down."

In 2000, 17 technology firms went private. That compares to four companies in 1998, according to a recent story in BusinessWeek. This year, companies such as Agency.com and Verifone are going private, with some speculating that Novell, 3Com and Apple Computer also might consider the move, BusinessWeek reported.

John Holt, president and chief executive of The Cobalt Group, said little will change with the organizational structure or business model as a result of Warburg Pincus' ownership.

"We all feel this is sort of business as usual," Holt said, adding that the investment firm already holds 46 percent of the company. "They have historically owned enough that if they felt I wasn't doing the right things they would let me know it. The fact that they own more doesn't really change anything for us."

The company, with about 620 employees, will retain its headquarters in Seattle and no layoffs will occur as a result of the transition, Holt said. The composition of the board has yet to be determined, he added. While the structure of the 6-year-old company will not change, the move from public to private will have some effects both financially and psychologically. Most obvious, The Cobalt Group no longer will have to publicly disclose its financial performance each quarter, a potential benefit to executives who spend hundreds of hours each month wooing Wall Street investors.

It also could have an indirect effect on employees, admits Holt. "Being associated with a public company was part of this whole Internet mythology ... so for some it is a dream deferred," he said. "On the other hand, Cobalt has already proven that we are built to last, and if you ask employees at the end of the day if they want to be part of a really good company with a really good business model with all sorts of bright prospects or be part of a public company that is trading at 25 cents a share they would take the former."

Although Holt and Warburg Pincus own 49 percent of the outstanding shares of Cobalt's common stock, some say the company must carefully avoid legal landmines as it makes the transition out of the public marketplace. "You have to tread very carefully with respect to the rights of the public shareholders," said Christopher Wright, an attorney at Cooley Godward in Kirkland. "They have an entitlement to scrutinize the fairness of the transaction, the conduct of the board members in respect to the transaction, and typically they have dissenters' rights."

Holt declined to comment on the possibility of shareholder lawsuits, saying only that the buyout offer is a substantial premium to the trading price. He said members of the board of directors convened a special committee to evaluate the unsolicited bid from Warburg Pincus and the committee recommended the offer.

The Cobalt Group reported a net loss of $7.5 million during the first quarter on revenues of $13.6 million. It had $10.4 million in cash at the close of the quarter and a $10 million credit facility.

In addition to helping automobile dealers and manufacturers with their Internet sites, The Cobalt Group operates the MotorPlace.com business-to-business automobile exchange, the PartsVoice automobile parts locating service and the DealerNet consumer site.

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