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SCO Finds Angel Money

Just days after the Lindon, Utah-based SCO Group saw its stock skyrocket at the news of an expanded legal battle against IBM, the company said that it has received a $50 million private investment led by BayStar Capital.

The investment equals 2.953 million shares overall, giving Larkspur, Calif.-based BayStar a 17.5 percent ownership in the firm as a whole.

In a Friday conference call outlining the announcement, an excited SCO president and CEO Darl McBride touted the financing deal as "monumental," and deflected all questions about pending litigation as "irrelevant" to the funding news. According to McBride, the financing and the lawsuits are two separate issues entirely, and with a partner such as BayStar in its corner, SCO is now prepared to tackle whatever comes its way.

"The momentum in the marketplace continues to shift in our direction," he said of his company, formerly named Caldera Systems. "We believe we have secured the capital necessary to fund all aspects of the long-term growth of this company."

At BayStar, Lawrence Goldfarb echoed these sentiments, adding that SCO's strategy and intellectual property made it a worthwhile investment, regardless of any pending legal troubles.

"[We] look to invest in growth-oriented firms with strong management, substantial market opportunity and solid, comprehensive business plans, and we believe that all of those fundamentals are in place for SCO to succeed," he said.

Analysts aren't convinced that the $50 million is going toward paying salaries and funding capital expenditures.

"SCO has all but extinguished the respect they worked to earn from users in the past, and the litigations, threats, and lies about the validity of their licensing have eliminated confidence in open source users everywhere," said Shaun Guth, an open source developer in Sunnyvale, Calif. "This latest round of funding is just a front for more attacks against the GPL on the basis of so-called intellectual property."

The investment was structured as a private placement of non-voting Series A Convertible Preferred Shares, at a fixed conversion price of $16.93 per share. Net proceeds of the private placement, combined with SCO's cash balance reported for its third quarter ended July 31, 2003, will provide the company with a cash position of approximately $61.0 million.

With this in mind, Deutsche Bank praised SCO on Friday with a strong "buy" rating, the same rating the investment and securities firm had delivered in a report issued earlier this week. In a new report, Deutsche Bank analysts Brian Skiba and Matthew F. Kelly reiterated the $45 stock price they projected on Tuesday, adding that with $50 million from BayStar in the bank, SCO should have the resources to overcome any litigation.

"We view this financing as a positive sign the company is increasingly equipped to take on larger challenges ahead," the authors wrote in the new report. "The funding puts to rest any concerns about sufficient cash to pursue legal challenges and ongoing investment."

Still, questions remain about the future of SCO. The company is embroiled in vicious litigation with IBM , whom it sued last March alleging that Big Blue made its proprietary version of the UNIX operating system, AIX, available to the open source community. IBM countersued in August, filing in a Utah court claiming that SCO's case breaches contract with IBM, infringes on its patents and signifies unfair competition, among other things.

Since then, a number of sticky legal entanglements have ensued between SCO and other vendors who employ Linux, including Red Hat and SGI. SCO officials also have said they would consider going after individual users whom they feel have misused the company's Unix product, raising the ire of the Linux community as well. Members of that community claim that these actions would directly contradict the Gnu Public License (GPL), copyright law that essentially ensures the continued freedom of open-source code.