BayStar’s SCO refund dream comes true

In April, BayStar Capital II LLP said it wanted the money it invested in the SCO Group Inc. back. Now the venture capital firm is getting its wish.

On Tuesday SCO announced it will purchase BayStar’s 40,000 shares of SCO Series A-1 Convertible Preferred Stock for US$13, plus giving BayStar just over 2.1 million shares of its common stock.

In 2003, BayStar and the Royal Bank of Canada (RBC) each bought 20,000 and 30,000 of SCO’s preferred shares respectively after a recommendation by Microsoft Corp. In May, RBC sold 20,000 of those shares to BayStar and converted its remaining 10,000 to 740,740 shares of common stock.

SCO said BayStar’s 40,000 Series A-1 Convertible Preferred Stock has a face value of about US$40 million compared to the $10.1 million that its approximate 2.1 million common shares are worth, based on SCO’s Tuesday closing price on the Nasdaq.

Last year, SCO nailed IBM Corp. with a lawsuit, claiming that Big Blue had illegally contributed Unix System V code into the Linux project and started soliciting licensing fees from Linux users for using the open source operating system. SCO is also embroiled in lawsuits with Novell Inc. — SCO bought Unix from Novell in the 1990s but Novell claims it still owns some rights to the operating system — Red Hat Inc., Autozone Inc., and Daimler-Chrysler Corp.

Back in April, BayStar sued SCO saying the Unix company violated terms of its agreement. BayStar remained mum about the issue until April 22 when Lawrence Goldfarb, BayStar’s managing partner, spoke out to the New York Times.

Goldfarb told the Times that SCO had become too involved in debating the issues of free and open source software (FOSS) with Linux aficionados. BayStar wanted SCO to spend more money on its legal efforts and less money on traveling and publicity. “The public statements from Darl McBride, SCO’s chief executive, were too frequent and too grand for BayStar’s liking,” it was written in the Times.

This is the first time, since its inception in 1998, that BayStar has ever asked for a refund, the Times added.

Also, there were concerns that SCO was putting too much money into its core Unix business but SCO’s CFO, Bert Young, assured that SCO would continue to support its products and will announce new offerings at its SCO Forum in August in Las Vegas. In Q1 2004, SCO’s Unix division brought in US$11.3 million, an amount that continues to decline. SCO will announce its Q2 results next week.

Gordon Haff, senior analyst and IT advisor at Illuminata Inc. in Nashua, N.H., said SCO’s Unix business has been essentially dead since the collapse of Project Monterey — an effort spearheaded by SCO and other Unix developers such as IBM Corp. to develop a 64-bit Unix platform. SCO filing the lawsuit against IBM was simply the nail in its Unix coffin, he said.

However, Haff thinks BayStar’s accusation that SCO was putting too much into its Unix business was not well-founded because SCO has essentially abandoned the Unix market, and he speculated the fuss might have been part of BayStar’s negotiating tactics.

“When SCO undertook this lawsuit [against IBM] it very much made the decision to de-emphasize its Unix business,” he said. “From my perspective, with this focus on their IP (intellectual property) licensing, they were, in effect, out of the Unix business.”

However, Haff also speculated that BayStar wanted SCO out of the Unix business altogether. SCO still does have a Unix install base and even though it is essentially finished in that business, it can still milk some dollars out of its current users, he added, saying this is an issue BayStar might not have understood.

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Jim Love, Chief Content Officer, IT World Canada

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