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April 21, 2004

SCO’s problems could get worse before they get better

Unix vendor SCO Group Inc's share price has fallen over 27% since investor BayStar Capital indicated last week that it would like its $20m investment refunded, and things are likely to get worse before they get better, according to one of the few analysts following the firm.

By CBR Staff Writer

Decatur Jones analyst Dion Cornett noted in his latest Open Source Wall Street newsletter that should BayStar obtain an injunction to freeze its investment, fellow investor Royal Bank of Canada could do the same for its $30m investment.

Should that happen the Lindon, Utah-based Unix vendor will have its work cut out to fund its existing legal battles against IBM, Novell, Red Hat, AutoZone, and DaimlerChrysler, the progress of which could have prompted BayStar’s about-turn, according to Cornett.

In summary, we do not believe BayStar would request redemption if its hopes of legal victory had not turned decidedly negative, he noted. If BayStar intends to get its money back, then a lengthy court battle is likely. Worst case for SCO would be if BayStar obtained an injunction to freeze funds in the interim. In this event we would expect RBC to follow suit.

On the plus side for SCO, Cornett also noted that it is difficult for private equity investors to force redemption and that an injunction will be difficult to obtain. One person who will not be involved in sorting out the finances in any event is CFO Bob Bench, however, who has announced his imminent retirement.

Bench has been replaced by Bert Young with immediate effect and will assume the role of acting vice president of corporate development until his retirement later this year. Young was formerly CFO at systems management vendor LANDesk Software Inc and will be thrown in at the deep end as far as SCO is concerned in terms of dealing with BayStar’s requests.

The BayStar investment has been the subject of much controversy since it was agreed in October 2003, not least because a leaked email in March 2004 revealed that senior Microsoft executives contacted BayStar last year encouraging it to invest in SCO.

Microsoft’s approach to BayStar was confirmed after the leaking of an email sent from Mike Anderer of S2 Partners LLC, a consultant to SCO, to SCO vice president and general manager of SCOsource, Chris Sontag, and Bob Bench.

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The email said Microsoft referred BayStar to SCO and went on to suggest SCO should seek additional funding from Microsoft. That prompted IBM, which is defending itself against breach of contract and copyright infringement claims by SCO, to subpoena S2.

S2 has now objected to that subpoena, claiming that some of the documents sought by IBM are confidential, among other reasons. Of note in S2’s objection to the subpoena are its claims not to be aware of any documents in its possession concerning meetings and discussions with BayStar and RBC.

It does not do the same in response to requests for documents concerning meetings and discussions with Microsoft, however, instead admitting that it has documents in its possession relating to communications and meetings with Microsoft but will only produce them under a protective order due to them being covered by a confidentiality agreement with SCO.

There was also movement in Linux distributor Red Hat Inc’s case against SCO yesterday, as Red Hat filed a motion for the Delaware Court to reconsider its recent decision to delay the case until SCO versus IBM is completed. Red Hat argued that it will suffer an injustice from the delay as SCO is likely to continue its threats against Linux users.

This article is based on material originally published by ComputerWire

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