Aims of Memo

By Steven Vaughan-Nichols  |  Posted 2004-04-22 Print this article Print

What BayStar is really trying to do, said Dion Cornett, managing director at Decatur Jones Equity Partners LLC, is to get better terms for its deal. Cornett, who works at an independent equity-research firm focusing on small to midsized growth companies, said, "Theyre letting SCO know that they have a pretty big hammer. Whatever terms they negotiate will be better for A-1 shares, though, not common shares."

Tom Rhinelander, founder of New Rowley Group Inc., a technology market research and analysis firm, said he thinks BayStar is trying to distance itself from SCO, even though SCO has a board seat open for it.
"Investing in SCO is a high-stakes gamble. The reward is a massive, multibillion dollar settlement if SCO somehow manages to win in court," said Rhinelander, an eight-year veteran of market research firm Forrester Research.
"The risk is that with a legal defeat, SCO, and any SCO allies like BayStar, look like money-grubbing companies willing to derail the IT industry and negatively impact user companies just for a profit.

"The problem for BayStar is it is a very public gamble, with a SCO, Microsoft and a few allies versus the world angle," Rhinelander added. "At some point, with victory looking increasingly unlikely, BayStar probably felt like it needed to cut its losses, or at the very least—assuming it wont get its money back without a legal fight—show some distance between itself and SCO."

Rhinelander said he agrees that "SCO is hurting its cause trying to get press citations instead of quietly working the legal system. The only explanation for such a public campaign seems to be that SCO is hoping IBM will buy SCO just to silence it. "But given that IBM seems to be more than happy to battle this out in courts and that IBMs legal resources are essentially unlimited, a SCO victory or an IBM purchase seems unlikely."

Industry insiders said they doubt BayStar can get its investment back. They said that with the IBM trial under way, SCO needs the funds and would fight BayStars attempt to retrieve them. Stowell confirmed that SCO indeed would fight to keep BayStars funds.

BayStars move to recover its investment, insiders said, substantially lowers the chances that SCO could find another investor to buy out BayStars position—making it unlikely that the investment firm is indeed aiming to get its money back. Instead, analysts said, BayStar could have penned the memo with the aim of gaining more control of its investment in SCO, particularly in the area of SCOs legal battle with IBM. The investor may think SCO is not maximizing its chances of winning against IBM, they said. As to why BayStar initially kept quiet on its memo, industry insiders said the company may have intended to keep the situation low-key, negotiating with SCO privately for more control in the company. And whats the next step for SCO? "I think well continue to have business as usual," the companys Stowell said. "We continue to be funded by the $20 million BayStar has invested in the company."

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Steven J. Vaughan-Nichols is editor at large for Ziff Davis Enterprise. Prior to becoming a technology journalist, Vaughan-Nichols worked at NASA and the Department of Defense on numerous major technological projects. Since then, he's focused on covering the technology and business issues that make a real difference to the people in the industry.

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