April 23, 2004

BayStar wants SCO Group to focus solely on IP enforcement

Author: Chris Preimesberger

BayStar Capital of Larkspur, Calif., a private hedge fund which invested $20 million in the SCO Group last October and then called the loan back last week, told NewsForge Thursday that it doesn't believe SCO's senior management is experienced enough in IT litigation to fully reap the financial benefits from the company's intellectual property.

BayStar spokesman Bob McGrath told NewsForge Thursday evening that BayStar asked in an April 15 letter to have its stock redeemed because "we wanted to get SCO's attention on the management problems we see," McGrath said.

"We have been pursuing this for some months with them (SCO Group), both verbally and in writing," McGrath said. "We're acting on behalf of our shareholders, as always, because they are entitled to a reasonable return on their investment. We think at this point, to create the value we need, that SCO Group will need to make some changes in senior management."

McGrath would not be specific about which officers should be replaced, but SCO Group is not a large company, and there aren't that many executives. CFO Robert K. Bench, in an interesting bit of timing, announced this week that he is retiring in the fall, so he is off the hot seat. SCO Group's key brass include President/CEO Darl McBride, Senior VP Jeff Hunsacker, Senior VP Chris Sontag, and VP and General Counsel Ryan Tibbetts. By the way, Bench and Hunsacker both sold off a substantial amount of SCO Group stock last year.

Right now, SCO Group's biggest value is in its intellectual property ownership, McGrath said, and not in its Unix products and services. SCO Group reported income of about $11 million in Unix products and services (ongoing contracts) and a meager $20,000 from SCOsource initiatives -- new business -- last quarter. "We still think SCO Group has a strong story in the value of its IP," he said.

"It's questionable whether SCO Group should continue in the (Unix) market," McGrath said. "We're looking for the best return we can, and we think the focus should be on IP licensing (and enforcement)."

BayStar managing partner Lawrence Goldfarb told The New York Times he was concerned that SCO Group's priorities aren't in the right place, and that company executives were spending too much time and energy "in publicity and debate" with open source advocates about Linux, rather than focusing on legal strategy.

McGrath indicated to NewsForge that BayStar's main interest in SCO Group is its $5 billion IP lawsuit case against IBM, which it filed March 6, 2003. SCO Group, formerly Caldera, claims that it holds the copyrights to Unix System V code and that some of that code has found its way into new Linux distributions and IBM's AIX system over the years. Novell also claims to hold the copyrights on some of the same code; SCO Group and Novell are litigating separately on that issue. SCO Group is also suing DaimlerChrysler and AutoZone for alleged IP violations.

SCO Group and IBM are still in the discovery phase of the case, which is scheduled to go to trial in spring 2005.

"We think that David Boies (SCO's lead attorney) is a strong litigator and will prevail," McGrath said. "We believe that the lawsuit will come to a satisfactory conclusion for everybody concerned."

A satisfactory conclusion for BayStar and SCO Group in this case would be one of three options: a court judgment in the lawsuit; an out-of-court settlement with IBM; or a buyout by Big Blue.

IBM has already said it will pursue all its legal options in the lawsuit and is not interested in buying out SCO Group or settling the litigation out of court.

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