SCO Update

Last week, we looked at SCO's stock price as a sort of public referendum on the company's prospects. Shortly thereafter, the SCO Group made it clear that company management, too, is watching the stock price closely, and is not pleased with what it is seeing. Thus, SCO has announced a stock buyback program in the hopes of raising the price somewhat - or, at least, halting its decline.

What the company has announced is that the board of directors has given its OK for management, "at its discretion," to buy up to 1.5 million shares of SCO stock over the next two years. Board chairman Ralph Yarro is quoted as saying:

The interesting thing, of course, is that capital resources is one thing the SCO group lacks. From the latest quarterly report filed with the SEC, we read that "Our cash and equivalents balance decreased from $64,428,000 as of October 31, 2003 to $57,945,000 as of January 31, 2004". $58 million is not a small cash pile, but one should bear in mind that this pile has to sustain the company in litigation for over a year until the IBM case comes to trial. Delays in that trial seem likely; if SCO should somehow win some sort of judgment, an appeal also seems likely. SCO's ability to stay afloat long enough to see its various lawsuits through is doubtful as it is, without spending millions of dollars on stock buybacks.

Company management understands this; that is why the same quarterly report includes this text:

Spending SCO's scarce cash on SCO stock would thus seem an absurd thing to do. So one might well wonder what is really going on. If one were given to wild speculation, one might come up with either of the following scenarios:

• The press release states that the shares will be repurchased "on the open market, in block trades and in privately negotiated transactions, depending on market conditions and other factors." It is not that hard to imagine "privately negotiated transactions" being used to funnel money out of the company and into the pockets of selected shareholders (at "privately negotiated" prices) before the whole thing falls apart.

• The company has no actual intention of buying back shares; it simply issued a PR in the hopes of convincing investors that the price will be going back up soon.

The first scenario looks like a "go directly to jail, do not pass 'Go'" card for the people involved. One never knows, but looting the company in that way looks extreme even for SCO. The second option (issue a PR, do nothing), on the other hand, is something we've seen from this company before. We will find out for sure in future SEC filings, but the odds are that SCO will not be buying back those 1.5 million shares.

Meanwhile, the public confirmation from BayStar that Microsoft did, indeed, direct them toward investing in SCO has had its own effect on how the whole SCO case is seen by the wider public. SCO has, at this point, definitively lost the public relations battle.

Finally, a related development is the announcement of the launch of Open Source Risk Management and its "open source risk protection services." OSRM will sell you an indemnification policy for free software, and will even allow customers to modify that software. The company's offering is based on "sophisticated code-scanning technology and a set of best practice protocols," along with the results of Groklaw's efforts to track down the origins of the code in the Linux kernel. We can only welcome a company which is trying to make free software users sleep better at night, but it should be noted that this sort of insurance policy needs a risk to insure against. As SCO goes down in flames, potential customers might well wonder if they really need this sort of protection. Let's hope that some other hungry, litigious corporation does not answer that question for them.

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