INDUSTRY ANALYSIS

The Mystery of BayStar, Microsoft and SCO

SCO has just over US$60 million in resources to sustain it while it fights IBM in what clearly is one of the most volatile wars in the history of technology. What has been very interesting is that SCO publicly has been given almost no chance of winning, while privately the company has convinced several folks, including me, that it has a strong chance.

One of the most interesting investors was BayStar Capital, which not only invested $20 million of its own money in the firm, but also prevailed on the Royal Bank of Canada, typically a conservative investor, to kick in another $30 million.

While both of these entities clearly would have had to do substantial due diligence before making investments of this scale, those activities were overshadowed by a leaked e-mail from a SCO consultant that tied the BayStar investments — and, through BayStar, Royal Bank — to an unnamed Microsoft executive.

This “news” created several highly speculative columns and articles that suggested Microsoft was actually behind SCO, pulling the strings. To date, however, only a trivial (to Microsoft) licensing deal for about $12 million has been directly connected to Microsoft, and, outside of the leaked memo, there is no apparent direct financial relationship between BayStar and the firm that would allow Microsoft to direct BayStar’s investment strategy.

Lack of a Microsoft Connection

Currently, the industry believes the Microsoft executive who recommended the deal was the then-departing head of Microsoft’s Mergers and Acquisitions unit, whose primary distinction was that he wasn’t allowed to do any mergers or acquisitions.

What likely happened is that he had recommended this investment internally, and Microsoft’s CFO — who apparently doesn’t like to do mergers or acquisitions and is known to be very conservative — had said “no.”

He then pitched it to BayStar either just before or just after leaving the company himself. This is just speculation — we might never really know the actual sequence of events — but it now seems clear that Microsoft itself was not directing either BayStar’s or SCO’s actions.

BayStar Wake-Up Call

About a week ago, BayStar delivered a memo to SCO claiming breach of contract and effectively asking for its $20 million investment back. SCO immediately disclosed the memo, and the general consensus was that BayStar had lost faith in SCO and was pulling out of the process. Speculation at the time connected the request to IBM’s recent filing for summary judgment, even though that connection was extremely unlikely.

The reason it was unlikely was that the IBM filing had been expected for some time; these requests are common in cases like this and are rarely granted. For instance, during the Caldera-Microsoft trial on Dr-Dos, Microsoft filed nine similar requests before finally settling in Caldera’s favor. This would suggest that, assuming BayStar really did its due diligence, this filing was expected and should not have changed the company’s position in support of SCO.

Something else that was interesting but not really explored in the rush to “prove” SCO once again had no chance was that the method BayStar was using likely would not be successful in getting most of the money back. SCO clearly would fight BayStar’s request — and SCO undoubtedly would use the money BayStar had given it to fund this fight.

In the end, there was a good likelihood that BayStar would get a fraction of its investment, if anything, back, thereby ensuring that the Royal Bank of Canada would never do business with BayStar again. This is a bigger risk than it seems because the Royal Bank of Canada is considered to be the keystone bank in Canada. This means almost all of the other banks in that country look to the Royal Bank for direction; if the Royal Bank takes offense to what BayStar did, there is every possibility that the rest of the Canadian banks would avoid BayStar like the plague.

Typically, if you’re an investor and you really want your money back, you would quietly explore someone else taking your investment position because you wouldn’t want to lower the value of the investment by publicly stating your concerns. What was incredibly interesting — or troubling, if you were a SCO or BayStar investor — was that after sending this memo, BayStar went dark. The company broke off communication with SCO and refused to take any interviews with the press for almost a week.

BayStar’s Motives

BayStar had done an interview a few days before sending the note to SCO, but that interview had not yet appeared in print. In it, the company continued to state its position that SCO would prevail against IBM, and it displayed no lack of confidence in the outcome.

The other reason an investment firm like BayStar might do something like this is to take a more active role in controlling the company. BayStar always has had the opportunity to take a board seat, but a board member has little to say about day-to-day company operations.

Steve Lohr at The New York Times was able to get an interview with BayStar’s Lawrence R. Goldfarb, who explained the critical “why” behind the memo. The explanation is consistent with the need BayStar might have to take a more active role in running SCO. In fact, Goldfarb is paraphrased as saying that if SCO reformed its management practices, BayStar “might keep its funds in SCO.”

You will note that, in the interview, Goldfarb continues to affirm that the company believes SCO probably will prevail. So, what is it that he and BayStar want to see changed?

It is highly unusual to see a case tried in the media, as is happening with this one, because it can damage the chances of success. More to the point, the process currently does not seem to be working to SCO’s advantage. In fact, media focus on the case clearly is making it difficult for companies to do business with SCO or invest in the company.

The media spotlight also might make it difficult to find a jury that is unbiased for the trial. As such, it appears to be lowering SCO’s chances of success over time and is a huge distraction for SCO’s executive team.

Need for Change at SCO

I have to admit I’ve had similar concerns. This litigation is more critical than anything else SCO is likely to do. If the company were to lose the IBM litigation, the rest of its actions against companies that use Linux would probably fall apart. Even if they didn’t, the backlash from IBM could be great enough to make SCO nonviable as a company.

This speculation suggests that as far as priorities for the firm go, the litigation is priority one. There might not really be a priority two that is important enough to sustain at this time, which could mean the executive staff should be taking almost all of its direction from the legal team as opposed to the other way around. Everything the company does privately or — especially — publicly, should be focused on one thing and one thing only: winning the litigation.

BayStar wants SCO to win not because of any religious feelings one way or the other on open source or Linux, but because BayStar wants to see a return on the significant investments it and the Royal Bank of Canada have made in the company.

BayStar’s expectation is that SCO will win and that it will receive several times the amount it put into the firm. It simply wants to ensure this outcome. The question now is whether SCO can appease BayStar short of replacing the core executive team with intellectual-property attorneys. My guess is that — regardless of any staff changes — we will see a much more focused and quiet SCO in the weeks and months ahead.


Rob Enderle, a TechNewsWorld columnist, is the Principal Analyst for the Enderle Group, a consultancy that focuses on personal technology products and trends.


11 Comments

  • Brilliant work once again Rob!
    .
    I can’t believe all of these doubters. Have they seen SCO evidence? No! Of course not! And even if they had, most couldn’t really analyze the evidence the way a true analyst such as yourself could. And you have the support of other top analysts who have also seen the evidence, such as Laura DiDio. In addition, Microsoft recommended the investment to BayStar. With that kind of endorsement, I have shifted my life’s savings to SCO stock. The current lack of confidence in SCO has allowed me to buy SCO stock at bargain prices with really cheap loan money. By next year, SCO will be sitting on top of a mountain of money, and I will be able to sell my stock and retire!
    .
    I must admit that I had my doubts in the beginning. I just didn’t realize what a strong case SCO had, until I got the word from you and Laura. You two rock! Serves those commie Linux kooks right! Hopefully, we can save the software industry before they destroy it with their evil viral GPL. Maybe Microsoft can help our legislators to innovate some laws to stop Linux before it is too late. I sure hope so.
    .
    Anyway, I would like to thank you once again for your brilliant and insightful work. You and Laura are like two lighthouses in the darkness showing us the way with your billiant light!!!
    .
    Love Microsoft!!! They lead us to technical salvation!

    • The thing is you need to prove a connection. I could say that Russia is directing George Bush because there are calls that go back and forth and then say, it is "inconclusive". Someone needs to show that BayStar is being directed by Microsoft and that SCO is being directed by BayStar (which clearly isn’t true given BayStar wants new management).

      So no there is no evidence that Microsoft even recommended SCO as an investment as a company let alone is directing things behind the scenes. All FUD. Nicely done though.

      • One more thing, Rob, are you going to make this response disappear like you made that paragraph disappear from your previous article, you know, the one that betrayed your total ignorance of legal procedure?

        The paragraph that read (paraphrased)

        "they will hide the essetial information from IBM during discovery and spring it during trial"


        Please tell us again how much litigation experience you have. I’m one who is certainly impressed by how much you leanrned in your litigation experience.


        Have you given SCOldera lessons in how to hide evidence during discovery and spring it on IBM during the trial?

        Considering that you have so much litigation experience you should offer your assistance to SCOldera in that regard.

        • Ownership is a huge question, other than that this is mostly anti SCO FUD. SCO does have cash flow around $11M, they are not profitable which is different (they have huge legal fees). I don’t know how much you make but $11M is not "almost no" to me. They are a small firm.

          Suggesting the Royal Bank of Canada is "playing litigation lottery" is an AM azing stretch.

          • Hello,
            SCO are PROVEN LIARS after the "SCO Forum". For a clear description of this go to http://perens.com/Articles/SCO/SCOSlideShow.html.

            Why do you have such faith in PROVEN LIARS?

            And you can’t explain the endless delaying tactics of SCO in their litigation against IBM. I think IBM know a lot more about this case than you do, and if SCO had any reasonable evidence, IBM would have settled a long time ago.

            IBM are willing to fight this case because they know they will win.

          • Thanks go-microsoft, that was hilarious. I just hope there isn’t anyone out there who really did put their life savings into the SCO scam. Personally I shorted them at 15.72 and recently covered at 7.25, and I’d like to take a moment to thank Rob, Laura, Dan Lyons, and all the other shills who kept that POS afloat long enough for me to get in at the absurdly high price I did. Thanks guys!
            And by the way Rob, SCO’s legal team has admitted in several briefs that they currently have NO EVIDENCE to back their claims, and need access to the entire AIX/Dynix source tree if they are ever to uncover any. Apparently you are easy to convince. Say, I have this terrific MLM opportunity..

  • Readers should know that Microsoft is an important client of the Enderle group, Rob’s consulting firm.
    .
    Rob’s firm specializes in spinning stories that may seem unfavorable to his clients. It appears that is what is happening here.
    .
    But anyway, the Microsoft connection is not a matter of a single unnamed executive.
    .
    http://www.businessweek.com/technology/content/mar2004/tc20040311_8915_tc119.htm
    <quoting>
    Lawrence Goldfarb, managing partner of BayStar, says that senior executives at the software giant had telephoned him about two months before the investment. Would he be interested in investing in SCO, they asked? Goldfarb wouldn’t identify the executives, but says neither Chairman William Gates nor CEO Steve Ballmer were AM ong them.
    <end quote>
    .
    Rob has a lot more spinning to do on this issue.
    .
    At first both Microsoft and SCO insisted there was no connection to Baystar.
    .
    Then when the Anderer letter was released, SCO insisted that Anderer was misinformed and was corrected with the information that there was no Microsoft connection.
    .
    Now that there are more than one Microsoft executives who called Baystar and who according to Baystar had their own agenda, the story Rob either retells or made up is simply not enough.
    .
    http://www.nytimes.com/2004/04/22/technology/22sco.html
    <quote>
    "It was evident that Microsoft had an agenda," Mr. Goldfarb said.
    <end quote>

  • I think there’s quite a bit of spin in this opinion piece.
    What we actually know is that, AM ongst the small group of people that support SCO, one of the most important has serious reservations about the way they’re proceeding.
    Remember: the actual ownership of this apparently intensely valuable IP is in question.
    SCO has almost no cash flow, and yet is now involved in litigation with some of the largest and richest companies on the planet.
    I think it’s also been stated previously that RBC took their stake on behalf of a client seeking a hedge, which is not the same as RBC believing in SCOs case.
    Once you understand that the investors are just playing litigation lottery, it’s only a handful of execs and their new best-friend Rob Enderle that seem to actually believe 100% in this litigation spree.

  • ‘This is just speculation — we might never really know the actual sequence of events — but it now seems clear that Microsoft itself was not directing either BayStar’s or SCO’s actions.’
    Really? Nothing ‘seems clear’ — yet. However, one thing that is clear is that Rant for Rent Rob works for Microsoft. Need proof?:
    http://www.eweek.com/print_article/0,3048,a=110659,00.asp
    ‘Editor’s note: Microsoft Corp. is a client of the Enderle Group, the consulting firm headed by Rob Enderle.’
    Need I elaborate?

  • Rob,
    Based on your article, I could not tell what information you used to make the statement below (in particular, "…it now seems clear that…").
    "This is just speculation — we might never really know the actual sequence of events — but it now seems clear that Microsoft itself was not directing either BayStar’s or SCO’s actions."
    Although I AM not privy to any special details, from press accounts alone it seems that there is nothing conclusive one way or another on this issue (only, as you point out, speculation), and that it still remains to be proven, disproven, or left undecided. Perhaps the IBM subpoenas and the entire litigation discovery process will shed some more light on this, but otherwise I don’t see how anyone can say that the matter is clear. Comments?
    MichaelB

  • You’ve made your position very clear over the past few months, but the reasons for this position have never been explained.
    .
    You claim SCO will win. Then you explain that claim by saying that they have a strong case. Then you’ll back up that claim by saying that you’ve been in contact with SCO weekly and you’ve seen things that lead you to believe etc etc.
    .
    What about facts? When are you going to back-up your "opinion" with facts and points of law, and maybe even lines of code? I think that’s what your argument, and SCO’s as well is missing in order for the rest of the world to believe anything that comes out of the SCO camp anymore.
    .
    I could say that I’ve talked to IBM and Novell. And I’ve heard about their legal strategies and I’ve studied everything I could find. I have a lot of experience in cases like these and I had a chance to discuss it with some of my lawyer friends etc etc. Everything I’ve found out tells me that SCO is going to get thrown out of court before the first day of summer.
    .
    But the same as you, just cause I said it doesn’t make it true.
    .
    And then again, to quote a TV celebrity, I don’t like to substitute other people’s judgement for my own, and when I compile everything I’ve found out from both sides…you’re arguments dont hold water, dont stand up to reality and are not very impressive at all.
    .
    You say SCO will win. I say, nobody’s holding their breath…
    good luck with that.

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