Microsoft Led SCO to BayStar

By Peter Galli  |  Posted 2004-03-22 Print this article Print

Company helped initiate SCO investment with BayStar.

The cat is finally out of the bag: Microsoft Corp. acted as the matchmaker for the $50 million investment led by BayStar Capital into The SCO Group last October, according to a BayStar official this month.

BayStar, of Larkspur, Calif., has investments in other hardware and software companies including Neoware Systems Inc., Roxio Inc. and Commerce One Operations Inc. It structured its $50 million investment in SCO as a private placement of nonvoting Series A Convertible Preferred Shares.

These shares are convertible into common equity at a fixed conversion price of $16.93 per share—the average closing bid price for the companys common stock for the five trading days prior to and including the date of closing. Once converted, BayStar will own an aggregate of approximately 2.95 million shares of SCO common stock, or 17.5 percent of the companys outstanding shares.

SCO has sued IBM for more than $5 billion related to Linux and is also fighting lawsuits against Novell Inc., Red Hat Inc., DaimlerChrysler Corp. and AutoZone Inc.

While speculation has been swirling for months that Microsoft played a role in the BayStar investment, the allegations rose again with reports of a memo that links Microsoft with a financial backer of SCO. That memo was published on the Web last week by open-source advocate Eric Raymond.

The confirmation of Microsofts role as the matchmaker for the investment came this month when BayStar spokesman Tom McGrath confirmed that BayStar managing partner Lawrence Goldfarb had been contacted by unnamed senior Microsoft officials about two months before its investment in SCO.

"Yes, Microsoft did introduce SCO to BayStar as a possible investment opportunity, but I need to reiterate that Microsoft did not participate in the SCO investment and is also not a participant or investor, either directly or indirectly, in BayStar," McGrath told eWEEK.

He declined to speculate on why Microsoft might have wanted to point BayStar toward SCO as a possible investment, saying, "Youd have to ask Microsoft that. But BayStar made 64 investments last year alone in companies in the life sciences, media and software."

He declined to say if it was unusual for executives from Microsoft to call and point the company toward a specific investment possibility. "I dont want to be specific as to Microsoft, but, generally, we get ideas, suggestions and recommendations from a variety of sources. Remember, Microsoft is itself an investor in a lot of companies," he said.

Microsoft spokesman Mark Martin would only reiterate the stance that the company has "no direct or indirect financial relationship with BayStar." Martin declined to comment on Goldfarbs admission that Microsoft had approached him about investing in SCO.

Peter Galli has been a financial/technology reporter for 12 years at leading publications in South Africa, the UK and the US. He has been Investment Editor of South Africa's Business Day Newspaper, the sister publication of the Financial Times of London.

He was also Group Financial Communications Manager for First National Bank, the second largest banking group in South Africa before moving on to become Executive News Editor of Business Report, the largest daily financial newspaper in South Africa, owned by the global Independent Newspapers group.

He was responsible for a national reporting team of 20 based in four bureaus. He also edited and contributed to its weekly technology page, and launched a financial and technology radio service supplying daily news bulletins to the national broadcaster, the South African Broadcasting Corporation, which were then distributed to some 50 radio stations across the country.

He was then transferred to San Francisco as Business Report's U.S. Correspondent to cover Silicon Valley, trade and finance between the US, Europe and emerging markets like South Africa. After serving that role for more than two years, he joined eWeek as a Senior Editor, covering software platforms in August 2000.

He has comprehensively covered Microsoft and its Windows and .Net platforms, as well as the many legal challenges it has faced. He has also focused on Sun Microsystems and its Solaris operating environment, Java and Unix offerings. He covers developments in the open source community, particularly around the Linux kernel and the effects it will have on the enterprise.

He has written extensively about new products for the Linux and Unix platforms, the development of open standards and critically looked at the potential Linux has to offer an alternative operating system and platform to Windows, .Net and Unix-based solutions like Solaris.

His interviews with senior industry executives include Microsoft CEO Steve Ballmer, Linus Torvalds, the original developer of the Linux operating system, Sun CEO Scot McNealy, and Bill Zeitler, a senior vice president at IBM.

For numerous examples of his writing you can search under his name at the eWEEK Website at


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