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4/21/2004
03:12 PM
Mitch Wagner
Mitch Wagner
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Baystar Vs. SCO: More Ironic Than Alanis

You have to appreciate the irony of SCO's situation. How frustrating - to be accused in public of doing something wrong, but not to be told what it is, so you can't even effectively defend yourself. SCO's entire business is at stake. This is pretty much what SCO did to the Linux community a year ago when SCO filed its lawsuit against IBM. And it's now happening to SCO, as investors BayStar Capital claim SCO has violated their investor agreement.

You have to appreciate the irony of SCO's situation. How frustrating - to be accused in public of doing something wrong, but not to be told what it is, so you can't even effectively defend yourself. SCO's entire business is at stake.

This is pretty much what SCO did to the Linux community a year ago when SCO filed its lawsuit against IBM. And it's now happening to SCO, as investors BayStar Capital claim SCO has violated their investor agreement. BayStar is demanding its $20 million back, and will say what SCO did wrong in only the sketchiest of terms.

All we can do is speculate about the real reasons why BayStar Capital is looking for a refund. BayStar isn't talking and SCO says all it knows is in a letter that BayStar sent to SCO on Thursday.

As Dion Cornett, a financial analyst with Decatur Jones Equity Partners LLC, pointed out, it seems unlikely that BayStar's stated reasons are its real reasons. BayStar cited specific sections of the investor agreement with SCO. The agreement is a dense thicket of legal language. But it appears that BayStar believes SCO either withheld information it was required to disclose, lied to BayStar, or failed to allow BayStar to review public statements and press releases, which SCO was contractually obliged to do.

Like I said, all we can do is speculate in the absence of information, but these appear to be unlikely reasons to ask for out of a $20 million investment, six months after announcing the investment and two months after drawing up the agreement.

BayStar had to know that its demand for money back would be a huge vote of no confidence, and could be a crippling blow against SCO. In asking for the money back, BayStar was damaging its own interests, its own $20 million investment in the company.

So the stated reasons for BayStar wanting out of the deal are probably a pretext. As Cornett notes, probably what's really going on is that BayStar thinks its investment in SCO has gone bad, and is looking to minimize its loss.

BayStar could be looking to save face. As Cornett said, BayStar is in the business of investing other people's money, and BayStar could well think that investing in SCO makes BayStar looks stupid. "It's one thing to lose a $20 million because you were stupid," Cornett said, "another thing because you were lied to."

BayStar could simply be looking for leverage to negotiate better terms.

Whatever BayStar is doing, it's terrible for SCO. The company will find it difficult to find other investors. And SCO needs other investors. The company only had about $11.4 million revenue in the first fiscal quarter of 2004 - note that's significantly less than the BayStar investment - and a net loss applicable to common shareholders of $2.3 million. SCO's future depends on its winning its claim that Linux infringes on Unix intellectual property claims owned by SCO. And that's going to be a tough fight:

- First they have to show that they, and not Novell, own Unix. SCO and Novell are in court over that issue.

- They have to prove that Unix intellectual property is in Linux.

- To win against IBM, SCO has to prove that IBM's own programmers put the IP in Linux.

- They have to break the General Public License, which has been in use for a decade or so. This is, in part, because SCO itself was distributing Linux under the GPL. If the GPL stands, the entire case collapses.

It's a tough job. Smart lawyers might be able to pull it off, but it's going to be expansive. SCO has to win lawsuits against other companies with much deeper pockets than theirs: IBM, Novell, Red Hat, AutoZone, and DaimlerChrysler.

One of the investors that SCO needs to keep happy is its own attorneys, Boies, Schiller and Flexner, who are working for both cash and for a 20 percent stake in SCO. If Boies, Schiller and Flexner decides SCO's future is weak, SCO could lose another major investor - and its lawyers too.

And now SCO has to keep BayStar from taking its money and going home, which may involve yet another lawsuit for SCO.

(This piece appeared in the Linux Pipeline Newsletter for Tuesday, April 20, 2004. It has been edited for the web.)

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