[SATLUG] NYTimes.com Article: Investor's Pullout Stirs Doubts About SCO

[Borries Demeler]

This attached NYTimes article may be of interest...

-Borries

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NYTimes.com Article: Investor's Pullout Stirs Doubts About SCO

April 22, 2004
 By STEVE LOHR 



 

The SCO Group received a large dose of cash and a vote of
confidence for its anti-Linux campaign last October when
BayStar Capital arranged a $50 million investment in the
company. 

BayStar, a private investment firm in Larkspur, Calif., put
$20 million of its own money into SCO, which is based
outside of Salt Lake City, and convinced the Royal Bank of
Canada to chip in another $30 million. The fact that
BayStar made its investment after a referral from
Microsoft, a Linux antagonist, only added to the impression
of coordinated support for SCO and its strategy. 

But BayStar broke ranks last Thursday when it told SCO it
wanted its money back, raising questions about the
company's future and its ability to wage a lengthy legal
attack on Linux. If SCO's legal campaign fades, the advance
of Linux as a popular alternative to Microsoft as an
operating system for computers used in business could
accelerate as the threat of litigation recedes. 

In an interview Wednesday, Lawrence R. Goldfarb, managing
partner of BayStar, explained why his hedge fund originally
invested in SCO and detailed for the first time what he
regarded as the wayward corporate behavior on SCO's part
that led to the recent split. 

Mr. Goldfarb described a company that had become too
engaged in publicity and debate with the passionate
advocates of the free Linux operating system. SCO's
management, he said, was traveling too much and spending
too much when it should have been concentrating its efforts
and resources on its legal strategy. 

"The real issue for us was spending and focus," he
explained. 

The public statements from Darl McBride, SCO's chief
executive, were too frequent and too grand for BayStar's
liking. 

Linux is an operating system that is distributed free. It
is improved and debugged by a worldwide network of
programmers, who share the basic source code, in a model of
software development known as open source. Linux has become
a mainstream operating system for running server computers
in data centers, competing with Microsoft's Windows and
commercial Unix offerings, like Sun Microsystem's Solaris. 

SCO holds rights to Unix, and it asserts that Linux, a
variant of Unix, violates its property rights. Others,
including I.B.M., contend that SCO's legal rights are less
far-reaching and that Linux is not in violation. 

In an open letter SCO put on its Web site last December,
Mr. McBride took on the advocates of free software like
Linux in terms that suggested the stakes in SCO's legal
dispute are high indeed. 

"There is no middle ground," Mr. McBride wrote. "The future
of the global economy hangs in the balance." 

BayStar, it seems, would have preferred that managers
pragmatically focused on running the business, mostly out
of the limelight. The BayStar view was that courts would
decide the validity of SCO's intellectual property claims
eventually, and that having the company's executives
embroiled in a running debate about the role of
intellectual property rights was counterproductive. 

SCO was becoming a significant distraction for BayStar, a
private hedge fund unaccustomed to publicity. BayStar was
involved in 64 deals last year in technology, life sciences
and media companies, with the average investment being $18
million. And SCO was only one. 

Microsoft initially recommended that BayStar take a look at
SCO. But there is nothing unusual about that, Mr. Goldfarb
said. BayStar often talks to the investment and venture
arms of major technology companies like Microsoft, Intel
and Cisco. "It was evident that Microsoft had an agenda,"
Mr. Goldfarb said. 

BayStar, he said, then did a lengthy assessment of SCO's
intellectual property claims and whether, if the dispute
ever came to a jury trial, the lawyer SCO has hired, David
Boies, one of the nation's top litigators, could win. 

SCO's claims in suits against I.B.M., DaimlerChrysler and
others that Linux is essentially an unauthorized version of
Unix, which it holds the rights to. 

"The issues for us were, first, is the intellectual
property claim valid, and if it went to a trial would David
Boies win or not?" Mr. Goldfarb explained. "Right, wrong or
indifferent, it was our position that we would prevail." 

Since its founding in 1998, BayStar has never before sent a
letter to a company seeking its money back, as it has with
SCO. In the letter last Thursday, BayStar asserted that
SCO's behavior violated provisions of the investment
agreement and that BayStar's convertible preferred stock be
redeemed. In a statement on Friday, SCO said that it did
not believe it had breached the provisions of its agreement
with BayStar. 

"We're unsure what their issues are," Marc Modersitzki, a
SCO spokesman, said yesterday. He added that the BayStar
letter was "a notification, not a legal action," and that
SCO hoped the two sides could settle the matter. 

For his part, Mr. Goldfarb said that with reforms in
management practices to address BayStar's complaints, it
might keep its funds in SCO. 

SCO's stock price, which fell 38 cents yesterday to $6.80 a
share, has dropped 30 percent since last Thursday, the day
BayStar sent its redemption letter. And SCO's stock is down
sharply from its high of more than $22 a share reached last
October, shortly after the BayStar investment was
announced. 

http://www.nytimes.com/2004/04/22/technology/22sco.html?ex=1083640593&ei=1&en=ae6b55b247203170


Copyright 2004 The New York Times Company