Tuesday, June 05, 2001 - 12:19 a.m. Pacific

By Alwyn Scott
Seattle Times business reporter

JIM BATES / THE SEATTLE TIMES Cobalt Group CEO John Holt, left, leads a budget meeting with Rajan Krishnamurty, the company's executive vice president and chief technology officer. Cobalt's executive board unanimously backed a plan to privatize the company, which has been publicly traded for almost two years.

Seattle is losing another Internet stock, but this time the company isn't going out of business.

Cobalt Group, the Seattle-based provider of Web sites and software for automakers and dealers, said yesterday it will return to private ownership after just two years on the Nasdaq stock market.

Under a deal reached Saturday, Cobalt will be bought by Warburg Pincus, its major financial backer, and some top executives and institutions in a transaction valued at about $35 million.

Shareholders will receive $3.50 a share, a 79 percent premium to the stock's closing price Friday. The stock closed at $3.38 yesterday, up $1.43 or 73 percent.

The acquisition, which shareholders are expected to approve in September, shows the willingness of some investors to buy Internet companies at current depressed prices. The deal removes Cobalt from the spotlight of public scrutiny and from the scramble for funding.

Warburg, as majority owner, presumably would continue to finance the company.

A New York-based investment firm, Warburg has poured about $45 million into the company, including most of Cobalt's current $10 million in capital. It already owns 46 percent of the stock, but precise details - including Warburg's stake, other future shareholders and what to do about employee options - remain to be worked out, said Cobalt Chief Executive John Holt.

"We're determined to be the last man standing, and this deal continues to make that a very high probability," Holt said. "It's obviously been tough for companies in our position to be public companies - you deal with death-watch articles and chat rooms."

Cobalt's board backed the buyout unanimously Saturday, and Holt, who owns 3 percent of Cobalt, has pledged to vote in favor of the buyout, giving Warburg 49 percent of the vote. Few institutions hold the stock.

Venture-capital investors said the deal probably reflects Warburg's admiration for the business, which, according to current guidance, is expected to generate positive cash flow by later this year.

By increasing its stake, Warburg hurts investors who paid more than $3.50 a share for the stock, a group that includes employees and executives. And Warburg stands to profit even more if the company goes public again in several years, since it will have a larger stake to sell. Warburg executives weren't available to comment.

"If you really like something, you want a much bigger reward for carrying the risk," said Bill Miller, a partner at OVP Venture Partners in Kirkland, which is not involved in the deal.

Cobalt is the second local company to go private in recent months. Lindal Cedar Homes, the Tukwila-based house builder, recently left the stock market after 30 years.

Buyouts of Internet companies are relatively rare. Potential investors often wait until the businesses are forced to close, since they pay less for the assets in a bankruptcy sale, said Adam Hamilton, an analyst at McAdams Wright Ragen in Seattle.

"A lot of companies wouldn't mind a white knight," Hamilton said. "But there haven't been a lot of them."

Copyright © 2001 The Seattle Times Company