April 21, 2004 9:00 PM PDT

BayStar: SCO needs new management

After nearly a week of silence, BayStar Capital said Wednesday its move to retrieve a $20 million investment in SCO Group is part of an effort to induce major changes at the Linux litigator--including new senior management and a withdrawal from the Unix product business.

BayStar, whose funding in October was paired with another $30 million from the Royal Bank of Canada, said it hasn't been happy with SCO's response to requests it has made in recent months. BayStar has invested in about 400 companies over the years, but only with SCO has it resorted to a request to have its shares redeemed.

SCO contends that the increasingly popular Linux operating system infringes its Unix intellectual property, an argument that is central to its lawsuits against IBM and AutoZone and that is supported by BayStar. But to make SCO's case stick, the company needs to change its management, focus on its legal case and communicate in a more "sensible, businesslike fashion," BayStar spokesman Bob McGrath said.

"We think they need to strengthen the senior team to get people with experience and background in the legal issues," McGrath said. If SCO addresses BayStar's concerns, McGrath added, the investor is open to reversing its redemption request.

SCO spokesman Blake Stowell said the Lindon, Utah-based company wants to resolve the issue but said it's not likely to make the three changes BayStar seeks.

"We're interested in resolving any issues BayStar believes they have. We're ready to talk when they're ready to pick up the phone," Stowell said. Regarding a replacement for Chief Executive Darl McBride or other top executives, Stowell said, "My belief is the members of our board are completely comfortable with the management we have in place now."

Stowell added that BayStar still hasn't detailed its contention that SCO violated four provisions of a Feb. 5 stock exchange agreement, violations that provide a basis for the redemption request. McGrath also refused to detail those alleged violations.

The BayStar dispute has given SCO a new headache as the latter simultaneously deals with several expensive lawsuits. And the funding is essential. It helped boost the company's cash position from about $6 million to about $60 million, according to Chief Executive Darl McBride, while the legal actions cost $3.4 million in the last quarter.

SCO's current lawsuits involve Unix licensees IBM and DaimlerChrysler, Linux user AutoZone, and Linux sellers Novell and Red Hat. It's also trying to sell intellectual property licenses to Linux users such as the National Energy Research Scientific Computing Center, threatening legal action if they don't buy the license.

BayStar asserts SCO's Unix products business doesn't hold long-term value for shareholders, McGrath said. SCO reported $9.7 million in Unix products revenue and $1.6 million in Unix services revenue in its quarter ended Jan. 31.

"We think there are limited prospects of that business ever generating growing and significant revenue," McGrath said. "And we believe it is diverting resources from going where they would have the most value--the intellectual property process."

SCO doesn't expect to drop that effort, Stowell said. "Unix is our core business, and I don't see that changing," he said. SCO sells two versions of Unix, OpenServer and UnixWare, which are used chiefly by companies such as McDonald's with numerous smaller outlets, restaurants or offices.

BayStar also has objected to SCO's vocal nature. "We have questioned the business purpose and value of much of the company's external communications in the period since we invested in October," McGrath said.

SCO's communications strategy has included executive speeches, open letters attacking Linux's legal underpinnings, and other high-profile messages. Inflamed Linux advocates have rebutted SCO's arguments with passion and sometimes vitriol.

Again, Stowell stood by SCO's practices. For example, letters SCO has sent "were designed to educate the marketplace, and we will continue to try to educate the marketplace," he said.

Regarding executive changes, SCO on Tuesday changed one member of its senior management, with Chief Financial Officer Bob Bench handing his job to Bert Young. That move was long planned and wasn't in response to BayStar's requests, Stowell said.

SCO's shares have plunged 30 percent from $9.66 on April 15, the day it received the BayStar redemption request, to $6.80 on Wednesday.

"We understand (BayStar general partner Larry Goldfarb is) disappointed that the stock price has been going downward lately," Stowell said. "We haven't been real excited about that ourselves. But we believe the long-term prospects of the company are good. We hope to be able to work out our differences with them."

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Daryl McLied
How 'bout that downtrend, Baystar? Gates is apparently no Buffet. What idiot at MSFT thought they could get away with this?
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