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BayStar Capital Management LLC has finally told The New York Times what its problems are with The SCO Group Inc. But according to SCOs director of corporate communications, Blake Stowell, BayStar still hasnt told SCO why its pushing to redeem its 20,000 shares of SCOs series A-1 convertible preferred stock, thus getting back its $20 million investment.
But BayStar spokesman Bob McGrath insists that, “For some time now, since we invested in SCO in October, weve seen things that weve been concerned about, and weve brought these concerns to SCOs board both in writing and verbally.”
BayStar invested in SCO, McGrath said, because the Larkspur, Calif.-based private investment firm “believed, and still believes, that SCOs intellectual property assets are valuable and that there is great potential for these to be monetized for its shareholders.”
“They have some valid claims, and with David Boies [SCOs lead outside attorney in its suit against IBM] involved in the execution of those claims, we believe that SCO can win.”
Specifically, McGrath said, SCO must change three things for BayStar to not attempt to pull its investment out of the company. First, “the management team at SCO must be strengthened and enhanced with executives who are experienced in litigation issues and in dealing with those issues from a public-company standpoint to get the best possible return.”
When asked point-blank if BayStar had anyone in mind that it would like to see in charge of SCO or anyone in particular it would like to see removed, McGrath replied, “No.”
SCOs Stowell said, “The management team in place has the full confidence of our board members, our employees and many of our shareholders. I dont foresee our management changing anytime.”
McGrath went on to say, “We believe SCO must focus its resources. Were not an insider, weve been learning about SCO in the past few months and now weve reached the conclusion that SCO should focus its resources on its most valuable asset: its intellectual property claims.
“SCO should not be spending resources, its time and money, on its other businesses, such as OpenServer and UnixWare. The return there, both now or in the future, will not give enough value for return to stockholders and investors.”
In The New York Times story, Lawrence R. Goldfarb, managing partner of BayStar, characterized SCO as spending too much time on debating open source with Linux advocates instead of focusing all of its energy on the litigation.
Finally, McGrath said BayStar is not happy with SCOs communications. “Were not sure what the business rational is for their ongoing communications, given that we think they should be focusing on litigation.” He added, “On the investor side, we havent seen good communications with shareholders.”
Stowell said he disagrees. “BayStar had access to all the same numbers and information that everyone else has. The agreement in early February to me showed that they had full knowledge of everything that was taking place in our company.”
Next Page: Analysts say BayStars memo may have sought more control, not money.
Aims of Memo
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.”