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SCO Kisses Off Rogue VC

SCO Kisses Off Rogue VC

SCO has mollified its estranged and publicly critical VC, BayStar Capital, by agreeing to buy back the 40,000 shares of SCO preferred stock that BayStar currently owns, both the 20,000 BayStar bought last year for $20 million and the 20,000 shares the Royal Bank of Canada insisted Baystar take off its hands a couple of weeks ago.

SCO will be paying BayStar $13 million once the deal closes and issuing the VC operation 2.1 million shares of SCO common.

The overall deal leaves SCO $37 million to the good and frees it from the backseat driving of what it has said was a petulant and unusually demanding VC, ending a particularly weird episode in the life of weird little SCO.

Under a separate agreement, the bank has already turned the other $10 million it held in SCO preferred stock into 740,740 shares of SCO common. The bank and the rogue VC get the common stock at a collective conversion rate of $13 a share.

News of the deal tickled SCO's stock price and shares have been selling for upwards of $5.25 this week, at least for a little while.

BayStar was introduced to SCO by an ex-Microsoft hand last year, when it was looking for money to press its anti-Linux litigation. BayStar, which the Linux faithful characterized as a Microsoft proxy, persuaded the bank to take the lion's share of the $50 million investment the pair made in SCO last fall. The $50 million bought them 17.5% of the company, a non-voting position.

The investment proved too risky for the presumably staid financial institution after it read about BayStar's doubts about the way SCO was being run in the New York Times.

BayStar wrote SCO in April demanding its money back - without ever - not even now - explaining what alleged contract breach SCO supposedly committed - and told the Times it wanted SCO's management out and the company focused on merely exploiting its IP, not fooling around with Unix or making provocative statements to the press about its litigation.

Things turned really odd when Baystar announced a few days later that - without retracting its demand that it get its money back - it was buying two-thirds of the bank's position to add to its own. It claimed that though it might have lost faith in SCO's executive suite, SCO's IP was still an attractive proposition.

BayStar never said what it paid the bank for the shares, but implied that it got them for less than the $20 million the bank paid for them last year.

The common stock can be liquidated on the public market, but the agreement with BayStar says the VC can't dump more than 10% of the average trading volume of SCO shares for the five days before any sale. SCO thinks BayStar and the bank will hang in there on the assumption that SCO will bound through the $13-a-share barrier again.

SCO claimed BayStar's current position behooves it to be supportive of SCO's plans and in a canned statement - smacking of canned crow - BayStar managing general partner Larry Goldfarb, he of the Times interview, mumbled something about being "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."

SCO said it will now retired all Series A-1 stock.

With the conversion, BayStar and the bank lose all of their special perks including their veto rights over the liberal contingency payments SCO has agreed to make to its famous lawyer David Boies and any settlement deals the company might strike to resolve its litigation.

By the way, part of SCO's deal with its lawyers, updated in November, included an award of 400,000 shares of SCO common stock. Those shares have yet to be registered.

As a result of the BayStar deal, SCO postponed releasing its second-quarter numbers, which were due this past Wednesday, until Thursday June 10. The delay will give it a chance to address the accounting related to the repurchase and the retirement of the preferred stock.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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