BayStar Keeping Quiet on Demand for SCO Redemption

By Steven Vaughan-Nichols  |  Posted 2004-04-19

BayStar Keeping Quiet on Demand for SCO Redemption

Days after BayStar Capital Management LLC told The SCO Group Inc. that it was ending its agreement with SCO and demanding that SCO redeem BayStars 20,000 shares of SCOs series A-1 convertible preferred stock, SCO says it still doesnt know why BayStar is doing this.

According to SCOs director of corporate communications, Blake Stowell, "BayStar hasnt responded to our requests for exactly how SCO breached four sections of the companies contracts."

"Theyve not been forthcoming to SCO or any member of the media," he said.

When asked directly how SCO has broken its agreement, BayStar spokesman Bob McGrath replied, "No comment." He added, "At this time, we are not answering any questions about SCOs announcement concerning BayStar." In short, BayStar is not even confirming that it send SCO the letter.

Some analysts have suggested that BayStar may have made its demands for immediate redemption of the shares because it wanted more control of the company. To that, Stowell replied, "When the exchange took place, they were offered a board seat. I believe that offer still stands, and to this point they havent chosen to take the board seat."

Stowell said he wanted to clarify that "just because BayStar is asking for redemption doesnt mean that it will happen. SCO is as well-funded today as it was a week ago, and redemption hasnt taken place."

Dion Cornett, managing director at Decatur Jones Equity Partners LLC, an independent equity-research firm focused on small to midsized growth companies, said, "I cant get inside BayStars brain, but I think theyre pulling out because they no longer believe SCO is a good investment."

Stacey Quandt, principal analyst at Quandt Analytics, said she agrees. "The implication is that BayStar thinks SCO will not succeed with its case."

Cornett continued, "I cant believe theyre doing this just because of a press release [one of BayStars purported claims against SCO]. I dont know what spooked them, but based on the timing, it might have been because IBM had just filed for summary judgment."

Quandt added, "When you look at SCOs situation, maybe BayStar has decided to cut their losses."

Next Page: Its very hard for a company to force redemption, analyst says.

Hard to Force Redemption

As for BayStar getting its stock redeemed, Cornett said he isnt optimistic about the companys chances if SCO fights back. "Its very hard for a company to force redemption. They know that," he said, adding that he thinks its "no more than a 50/50 chance that BayStar could get an injunction to free its money."

If BayStar does get its shares, though, Cornett said he expects the Royal Bank of Canada (RBC), which also financed SCO with $30 million as part of the package with BayStars $20 million, to "get out."

The RBC, along with BayStar, already got SCO to restructure the deal once before in December to prevent SCO from being sold without first obtaining their consent. The two investment houses did this in response to a deal by which a 20 percent contingency fee of any proceedings from the sale of the company would be awarded to SCOs law firm, Boies, Schiller & Flexner LLP.

But for now, bank spokesman Chris Pepper said, "We are aware of what BayStar is doing, and were reviewing our options."

Cornett said, "Ive seen private equity investment do this kind of maneuver to try for better terms or to get out. If they do intend to get out and get their money back, they will face a court battle. Its ironic—SCO will use the money they received from BayStar to defend themselves from BayStar."

Dan Kusnetzky, IDC vice president of system software, said he thinks SCO "will find itself embroiled in another legal contest."

"As an industry analyst, SCO needs customers, particularly big ones, and [it has sent] 1,500 letters threatening legal action, which is not a way to engender friendship," Kusnetzky said.

"SCO also need hardware backers, and theyve sued IBM, and HP has set up legal protection for its Linux customers against SCO legal actions. Theyve upset many customers and many of their partners, and thats not the equation for success.

"In the long run, if you look at the stream of revenue shrink and the cost of litigation rise, its hard to see how SCO can long continue."

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