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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 Inc. last October.
Microsoft has denied for months that it had any role in that investment, but a BayStar official on Thursday confirmed to eWEEK that Microsoft had indeed acted as matchmaker for the deal.
BayStar, which is based in Larkspur, Calif., and has investments in other hardware and software companies including Neoware Inc., Roxio Inc., Commerce One Inc. and Neoware Inc., structured its $50 million investment in SCO as a private placement of non-voting 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.
Speculation has been swirling for months now that Microsoft played a role in the BayStar investment, first reported as a possibility by eWEEK last October and more recently last week when those allegations rose again with reports of a memo that links Microsoft with a financial backer of SCO.
That memo was published to the Web last week by open-source advocate Eric Raymond.
The latest confirmation of Microsofts role as the matchmaker for the investment, rather than as an investor itself, came Thursday 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 on Thursday.
McGrath declined to speculate on why Microsoft might have wanted to point BayStar towards 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. We talk to investment banks, company executives, venture capitalists and analysts all the time, who point us toward possible investments,” he said.
However, McGrath also declined to say if it was unusual for senior Microsoft executives to call and point the company towards 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.
“But BayStar ultimately decides on behalf of its investors if it should make those investments. Remember, Microsoft is itself an investor in a lot of companies,” McGrath said.
For its part, Microsoft spokesman Mark Martin would only reiterate the stance it has held all along, that the company has “no direct or indirect financial relationship with BayStar.” Martin declined to comment at all on Goldfarbs admission that Microsoft officials had approached him about investing in SCO.
Microsoft has for months now been ratcheting up its battle against open-source software and Linux. In January, the company launched a new advertising campaign, referred to as “Get the Facts,” which is designed to give customers information about the advantages of using its Windows operating system versus Linux, its open-source competitor.
The ad campaign was seen as yet another way the Redmond, Wash., software firm is trying to counter the effects of the Linux operating system and is in keeping with the strategy embraced by Martin Taylor, who took over the role of Microsoft open-source and Linux strategist last July.
When he was appointed to the position, Taylor said he would make it his personal mission to publicize more studies that showed that Microsoft software beat the return-on-investment pants off the open-source alternatives.
Later in January, and building on that campaign, Orlando Ayala, the senior vice president for Microsofts small and midmarket solutions and partner group, sent an e-mail to all his staff, telling them that “there continues to be a great deal of noise in the marketplace about the growth of Linux.”
He went on to urge them to “separate hype from reality and make sure we work to understand what is really happening in the industry.”
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Also helping raise the suspicions of those in the open-source industry that Microsoft is behind the funding of SCO and its many lawsuits is the fact that SCO recently announced that EV1Servers.Net, the dedicated hosting division of Houston-based Everyones Internet, had signed an intellectual-property-licensing agreement with SCO, granting the firm the right to use Linux.
At the same time, EV1Servers.Net is also listed prominently on the Microsoft “Get the Facts” Web site, and even is posted as an industry case study that shows “the benefits of investing in Microsoft Windows instead of Linux through case studies profiling live installations.”
The case study is entitled “Leading Hosted Service Provider Deploys Windows-based Hosting Solutions Faster than Linux-based Solutions” and was posted to the site on September 15, 2003.
It states that “using the Server Provisioning component of the Microsoft Solution for Windows-based Hosting version 2.0, EV1 Servers.net has discovered that it can deploy a Windows-based server, along with the Ensim WEBppliance Pro control panel, in less than half the time it takes to deploy a Linux server with the same control panel.”
Asked about the relationship between Microsoft, EV1Servers.Net and SCO, Microsoft spokesman Martin would only say that “Microsoft had no involvement in the EV1 and SCO relationship. Microsoft is pleased to call EV1 a customer and an industry partner. However their dealings with other companies are their own.”
Microsoft has been stepping up its assault on open source and Linux following the loss of many high-profile customers to Linux, many of them governments and governmental agencies and departments.
In December the Israeli government said it would encourage the development of lower-priced alternatives to Microsoft software in an effort to help expand computer use by the public.
The governments of Britain, Brazil, Japan, South Korea, China, South Africa and Russia are also all exploring open-source alternatives to Microsoft, while federal agencies in Germany, France and China are all already using or considering open-source alternatives.
But Microsoft has been fighting back and has actively been lobbying governments around the world not to embrace open-source applications and Linux.
To that end, Microsoft last January announced a new global initiative to provide governments around the world with access to Windows source code under its Government Security Program, designed to “address the unique security requirements of governments and international organizations throughout the world.”
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