Quick SCO notes

SCO's suit against Novell had a day in court on May 11, when two motions were heard. SCO is trying to get this case moved back to state court, where it expects a more friendly hearing and where certain awkward issues, such as whether copyrights were actually transferred from Novell, cannot be considered. Novell, meanwhile, is opposing the move and is, instead, trying to get the whole case dismissed. Judge Kimball - the same judge presiding over the IBM case - has not yet ruled on either motion as of this writing. Groklaw has an informal transcript of the proceedings.

The $50 million in capital which was pumped into SCO last October is usually termed the "BayStar investment," but, in fact, $30 million of that total came from the Royal Bank of Canada (RBC). RBC made a couple of interesting moves last week:

• $10 million of that investment has been converted into ordinary SCO shares at $13.50 per share. The value of SCO's stock on the market was less than half that figure at the time, and has declined since; RBC, in other words, is taking a big loss on part of its investment.

• The rest of RBC's investment has been sold to BayStar at an undisclosed price.

From RBC's point of view, the moves are perhaps understandable. The chances of ever getting the original investment back from SCO were small and shrinking; RBC (or whatever investor is hiding behind RBC) decided to cut its losses and get out while it still could.

BayStar's motivation is a little harder to comprehend. After all, BayStar stated last month that it wanted to redeem its investment in SCO and get out; now it has, instead, doubled the number of preferred shares it holds. One assumes that BayStar got the shares for less than their original price, but, given BayStar's public lack of confidence in SCO and its management, why is it increasing its stake in the company?

One possibility which has been raised is that BayStar wants to increase its leverage over the board of directors and thereby improve its chances of forcing management changes on SCO. The RBC shares, if converted, would give BayStar an approximately 20% stake in SCO; enough to be heard, but still nowhere near enough to dictate changes. Alternatively, BayStar may think that, by way of court, it can extract the full $40 million represented by those preferred shares from SCO.

The most ominous possibility, perhaps, is that BayStar may be maneuvering to take possession (or, at least, control) of the IBM suit after SCO collapses. That suit is, after all, the one SCO asset that BayStar sees as being worthwhile. In this scenario, the case could continue long after SCO collapses. BayStar could, conceivably, apply more financial resources to pursuing this case. But no amount of money can make SCO's claims any more legitimate.

Finally, SCO's second fiscal quarter ended on April 30; an earnings report is due within the next few weeks. One assumes that its results will be something other than spectacular. Expect the usual theatrics as SCO's management attempts to distract attention from the fact that the company is losing its traditional customers, is not selling "Linux licenses," and continues to bleed cash.

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