BayStar leaves the building [LWN.net]

Back in October, 2003, the $50 million PIPE investment in the SCO Group by BayStar and the Royal Bank of Canada was seen as good news for SCO. In May, 2004, things have changed to the point that the dissolution of that investment is also seen as good news for the company. SCO, it seems, is in a different world than it was late last year.

BayStar had been left holding 40,000 of the 50,000 shares of "series A-1" preferred stock created by the initial investment. BayStar had also been very public about its desire to redeem those shares and its lack of faith in SCO's management. The result was a dark cloud of potential litigation lurking over SCO; it is not surprising that SCO was looking for a way to settle the issue. As it turns out, SCO did pretty well for itself.

The full stock repurchase agreement is available via the SEC. It calls for SCO to buy back those 40,000 shares of preferred stock; the cost will be $13 million in cash and just over 2.1 million shares of SCO common stock. So, in the end, SCO sold that stock for $50 million, and was able to buy it back (including the 10,000 shares redeemed by RBC) for $13 million and some paper. This is, indeed, a good deal for SCO; BayStar must have wanted out badly.

There are a couple of interesting provisions in the agreement. One is that BayStar is limited in how quickly it can sell the common stock; it can't make up more than 10% of the average volume on any given day. The two companies also agree not to badmouth each other. The effect of that agreement would seem to be immediately apparent. In April, BayStar was complaining about SCO's attempts to continue to look like a software company, SCO's management, and its lack of focus on the IBM case. In the press release describing the new agreement, instead, we read:

"After productive and substantial discussions with SCO's management team, board of directors and legal team, BayStar is extremely satisfied with SCO's current operating and cash management plans, new initiatives, management of the litigation, and plans for improving its business going forward," said Larry Goldfarb, managing general partner, BayStar Capital.

It is true that the company would appear to have muzzled Darl McBride recently. Other than that, however, there has been little change. The same management team is in charge, and it's doing the same things. If BayStar were so happy with SCO's progress, what reason could it possibly have for cashing out its investment now at a serious loss? BayStar, instead, gives every indication of running for the exit at full speed, preferably ahead of the quarterly earnings announcement (which has been delayed until June 10).

One other interesting feature of the non-disparagement clause:

...the Company's obligation not to disparage or defame BayStar as set forth above shall be limited to the actions or comments of the Company's executive officers, directors, attorneys, advisors [sic], consultants, representatives and The Canopy Group, Inc.

Canopy is not a party to this agreement. One might well wonder how SCO is able to commit Canopy to keeping its mouth shut.

The end result of all this is that the SCO Group has freed itself from a major distraction, cleared a liability off its books (including the 8% dividends it was supposed to start paying BayStar next year), and obtained $37 million of obligation-free cash (excluding lawyer fees, of course). The company is, indeed, in a better position to concentrate on its many open court cases. It may even be able to turn Darl loose in the near future; life hasn't been the same without his strange pronouncements.

[Looking forward: the next events in SCO's legal calendar include a hearing in the DaimlerChrysler case (June 9), and a ruling due anytime in the Novell case. The Novell ruling will include Novell's motion to dismiss, and, if that is denied, SCO's motion to move the case back to Utah state court.]

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BayStar's Satisfaction

Posted Jun 3, 2004 16:04 UTC (Thu) by The_Flatlander (guest, #19245) [Link]

So, BayStar has said that it is quite pleased with the deal.

Cool.

I'd like the people from BayStar to know, that if they want to invest several tens of million dollars with me, for just a week or two, I will return 90-95% of it within a couple of weeks. While I hold their money I will make no inflamatory statements to the press, and I promise not to say anything mean about them after I have returned [the vast majority of] their money.

Seems like I'm offering them a better deal than the one they got from the SCOundrels, and yet, I am not going to hold my breath waiting for them to send me a check.

The Flatlander

I'm just sure Uncle Billy is gonna make them whole - or else they wouldn't have gone for this deal to begin with.

BayStar's Satisfaction - sunk costs

Posted Jun 4, 2004 0:09 UTC (Fri) by giraffedata (subscriber, #1954) [Link]

Both the article and the comment seem to consider the sunk cost of this stock to be a factor in the value of the deal. Assuming Baystar has competent financial people, it paid no attention to the $50M it paid for the stock in a transaction which is now part of history. The deal with which it is pleased isn't the bad one made last October, but the one it just made wherein it got $13M plus stock in exchange for some other stock Baystar believes is worth less than that today.

And the part about Baystar being pleased with the company management is consistent with Baystar taking 2.1 million shares of common stock as opposed to even more cash.

Also, I'm not sure SCO comes out financially ahead in the present deal. Preferred stock isn't usually booked as a liability, so this might just be $13M net reduction in equity for SCO. But I agree that the deal last October was, in hindsight, a good one for SCO.