Article

BayStar calls for changes at SCO

Michael S. Mimoso, Editorial Director

BayStar Capital wants SCO Group Inc. to "strengthen its management team," put up a tougher court battle to defend its intellectual property and maintain a less public profile as it litigates against IBM Corp. and commercial Linux users, spokesperson Bob McGrath told SearchEnterpriseLinux.com today.

BayStar notified SCO last Thursday that it wanted to

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redeem its 20,000 shares of SCO stock, valued at $20 million, citing violations of the Exchange Agreement made between the two companies last October. McGrath was not specific about the violations today, but said SCO's actions have not been conducive to strong dividends for investors.

There is a need at SCO to focus on its core asset, its intellectual property.
Bob McGrath
SpokemanBayStar Capital

Should SCO redeem those shares, the company would lose close to half the money it has earmarked to defend its IP in court. In the meantime, SCO stock continues to plummet, falling to $6.60 in early trading today. Shares were more than $9 before BayStar's intentions were made public Friday.

BayStar's investment, coupled with money from the Royal Bank of Canada, gave SCO a $50 million "war chest" to defend its intellectual property, according to SCO Group president and CEO Darl McBride. SCO is currently suing IBM, alleging that Big Blue improperly donated System V Unix to the Linux kernel. It has also sued retailer AutoZone and manufacturer Daimler-Chrysler for their use of Linux, citing copyright and contractual violations.

McGrath also today questioned the value of SCO's Unix business, which lost $2.25 million year-over-year according to its first quarter earnings report. SCO also spent $3.4 million in legal fees fighting IBM, AutoZone and Daimler-Chrysler.

"There is a need for SCO to focus on its core asset, its intellectual property," McGrath said. "As we look at its ongoing business in other areas beyond intellectual property, we question whether those areas have future potential for return to shareholders. Their resources should be focused on [SCO's IP]. That's the best potential for generating a return for shareholders."

While McGrath may be speaking for investors and be solely concerned about ensuring a return for shareholders, SCO is holding fast to Unix as its core business.

"It's the cornerstone of everything we do. I don't foresee that changing," said public relations director Blake Stowell. "Last year it was a $50 million business for us. We're not going to just walk away from that."

BayStar is also not enamored with SCO's public posturing against IBM and the Linux and open source communities. McBride, for example, has made public statements questioning the constitutionality of the General Public License (GPL) that governs Linux. He also said that the removal of any potential offending code from Linux was possible, but that it would leave the operating system unrecognizable.

"Like it or not, this is a very public debate and there's a lot at stake here," Stowell said. "Obviously, Linux is an area of the industry seeing a lot of growth and attention. It's one of those things where it's difficult to talk about Linux without talking about SCO. We try to be selective about how aggressive and how public we are in the debates we want to get pulled into."

[Unix is] the cornerstone of everything we do. I don't foresee that changing.
Blake Stowell
Director of public relations

McGrath hinted that changes may be in order at the top for SCO.

"We feel that SCO needs to strengthen its management team and get executives with legal experience who know more about managing intellectual property and the litigation process," McGrath said. "We certainly have had concerns about some of the extended communication [from SCO]. We're not clear what the business value and strategy, if you will, that are behind some of those communication efforts."

Stowell countered that the management team has the full support of the board of directors, employees and most of the shareholders. He said he did not see changes coming for the management team.

BayStar said it is not opposed to reversing its redemption demands and reaffirmed its support of SCO's legal case.

"We invested in the belief that SCO's intellectual property was a significant asset," McGrath said. "We believe the claims made in the IBM litigation and what [attorney David Boise] was brought in to defend have a good chance to prevail."

BayStar confirmed last month, after a rogue e-mail surfaced from a consultant, that it was referred to SCO by Microsoft, giving weight to the theories floating in the open source community that Microsoft was somehow involved in SCO's legal tussle with IBM and the Linux and open source communities. BayStar added that Microsoft did not invest any money in SCO.


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