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SCO Raises New Funding--And Experts Raise Questions

Industry watchers wonder about the wisdom--and the motives--of the investors behind $10 million in new funding for the SCO Group, enabling it to pursue what is widely viewed as a hopeless lawsuit against IBM.
Industry analysts also had plenty to say about the investment and the litigation.

"SCO got a badly needed cash infusion," said Laura DiDio, an analyst at The Yankee Group in Boston. "Thanks to the $10 million it raised, it now has $12.6 million in cash on hand and no debt. The legal fees related to the lawsuit were capped and the lawsuit is paid for through the appeals process, according to McBride."

Yet DiDio also said she saw little hope that SCO could prevail, even with the additional cash. "It was always a long shot and it is still a long shot," she said of the company's litigation. "Presumably the investors know this as well and are willing to take the chance -- however slim or remote -- that SCO can eventually prevail . . . "The investors and the one board member are aware of the inherent risks and vagaries of SCO's position."

DiDio said the challenge for SCO going forward is that it "must carve out an identity for itself that is separate and distinct from the lawsuit, which has made it a pariah among the Open Source community."

Rob Enderle, principal analyst at the Enderle Group, had a similar take on the announcement. "Those that have already invested in the company may want to cover their bets and see how the hand plays out," he said. "Things clearly have not gone as SCO intended and they have managed the litigation relatively poorly and alienated, in the process, many who originally supported them."

Investors, Enderle speculated, "are betting IBM will settle out and SCO will get a bunch of cash, and then many of these investors will probably liquidate their holdings on the spike."

Yet SCO's long-term financial picture is far from secure, Enderle said, despite the influx of cash "SCO could still run out of cash as they are currently losing around $14 million a year and they only got $10 million," Enderle stated. "Court costs will increase as we approach the trials, though some have been capped, and revenues are dropping about 15 percent a year, which could accelerate."

"In short, I think they are short on cash, and the well is about dry," Enderle said. "Before this deal they were down to 6.5 million in cash with a total of $23.9 million in current assets. That's not a lot of buffer in what could be a very expensive year."

A SCO representative, however, said the company's legal prospects were excellent and that investors would be well-served by helping the company to persist in its offensive against IBM and others.

"Any open-minded individual who has read all of the public filings and court rulings, and attended every hearing would have a difficult time [casting doubt on SCO's prospects] at this point in the case," said Blake Stowell, SCO's corporate communications director.

"To the contrary," Stowell said, "for those who might see SCO's legal battle not going so well for SCO in the long run, I would be asking myself" 'Why is this case still proceeding? Why hasn't it been dismissed?'"

Stowell also challenged the assertion that SCO's investors displayed poor judgement, although he declined to speculate on their reasons for investing in the company.

"Some of these fund managers come from very sophisticated investment houses," he said. "They take a long-term view of our company and our business. Surely they have good reasons for investing in SCO, but that's a question you would need to ask them." After a long period of relative inactivity in SCO's litigation against IBM, December looks to be a busy month for the company and its attorneys. In addition to two discovery hearings scheduled for December 13 and December 20, Stowell said the presiding judge has set a December 22 deadline for SCO to specify exactly which intellectual property IBM allegedly misused.

The company has also stated that it will repot its latest quarterly earnings on December 21, after the market closes.