Microsoft Led SCO to BayStar

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.