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Buybacks and More on BayStar
Thursday, March 11 2004 @ 05:42 PM EST

Newsforge continues its investigation into the BayStar deal. It seems Mr. Anderer is nowhere to be found:

"S2, the Mike Anderer ('Halloween X') company that is suspected of brokering the big transaction for SCO Group, has all but disappeared from the face of the Earth. Its Utah business license has expired, its Web site is dead, and no one seems to know where Anderer is located. S2 had an office in Redmond, Wash. that now appears to have morphed into another company we discussed on Tuesday called Entirenet. S2 also had offices listed in Salt Lake City, Columbia, S.C., Royal Oak, Mich., and Charleston, S.C. until recently. All the phones are now dead except for the one in Michigan, which now belongs to another company that has no idea who S2 is -- or was."

Hmm. Curiouser and curioser. NewsForge emailed Mr. Anderer using an address SCO provided, but they got no reply and they publicly ask him to contact them.

Peter Galli, who was on the BayStar story back in October, has a thorough piece today also. Here's what he found out:

"BayStar, which is based in Larkspur, Calif., and has investments in other hardware and software companies including Neoware Inc., Roxio Inc., Commerce One Inc. and Neoware Inc., structured its $50 million investment in SCO as a private placement of non-voting Series A Convertible Preferred Shares.

"These shares are convertible into common equity at a fixed conversion price of $16.93 per share—the average closing bid price for the company's common stock for the five trading days prior to and including the date of closing.

"Once converted, BayStar will own an aggregate of approximately 2.95 million shares of SCO common stock or 17.5 percent of the company's outstanding shares. . . .

"'Yes, Microsoft did introduce SCO to BayStar as a possible investment opportunity, but I need to reiterate that Microsoft did not participate in the SCO investment and is also not a participant or investor, either directly or indirectly, in BayStar,' McGrath told eWEEK on Thursday.

"McGrath declined to speculate on why Microsoft might have wanted to point BayStar towards SCO as a possible investment, saying 'you'd have to ask Microsoft that

MS's mantra remains the same, they have "no direct or indirect financial relationship with BayStar." OK, what about EV1? Galli goes into some detail about that too:

"Asked about the relationship between Microsoft, EV1Servers.Net and SCO, Microsoft spokesman Martin would only say that 'Microsoft had no involvement in the EV1 and SCO relationship. Microsoft is pleased to call EV1 a customer and an industry partner. However their dealings with other companies are their own.'"

Of course, it was MS who told us for months that they had no involvement in the BayStar PIPE at all, as Galli points out. Newsforge thought to inquire directly if Microsoft had any involvement through the Royal Bank of Canada:

"When asked Thursday if Microsoft or any of its divisions had any input into the Royal Bank of Canada portion of the PIPE deal, Microsoft spokesman Martin told NewsForge that 'Microsoft had no involvement in that matter.'"

Now, about the buyback, the question is why. SCO's answer is that they are doing it to show their confidence in their stock:

"'This action reflects our strong belief in the fundamental value of our intellectual property and core business,' said SCO chairman of the board Ralph Yarro. 'At current prices, we believe our stock represents an attractive investment opportunity and that this action reflects our ongoing commitment to improving long-term stockholder value.'"

Could be. If you are interested in knowing why companies do buybacks, as I was, you'll find that is indeed one reason why companies do buybacks.

Bain & Company's Darrell Rigby, a Director at Bain & Company, a Boston-based global business consulting firm, has an article that explains buybacks, and they say companies do it for several possible reasons:

"Companies typically use Stock Buybacks to reduce dilution of their earnings. When a company buys back its own shares, it reduces the amount of stock in circulation. Future profits then are spread across fewer shares, potentially increasing a company’s earnings per share and the value of its stock. . . . Private trades allow a firm to buy out unwanted shareholders, self-tenders provide a method for repurchasing larger amounts of stock, and accelerated purchases allow a firm to immediately recognize the financial impact of the program. If successful, Stock Buybacks provide a more taxefficient method of profit distribution to shareholders, as capital gains are often taxed at lower rates than dividend income. Additionally, Buybacks are less binding to a company in the long run—they do not require SEC disclosure and can be scaled back under much less analyst scrutiny than a dividend reduction. . . .

"Companies use Stock Buybacks to:

  • Build investor confidence and shareholder loyalty;
  • Increase earnings per share and return on equity;
  • Obtain company assets at bargain values;
  • Boost share price by signaling that the stock is undervalued;
  • Increase the company’s debt-equity ratio through shifts in financing structure;
  • Offset dilution effects that are caused by the exercising of employee stock options."

There is also a research paper, "When a BuyBack isn't a Buyback." You can get the PDF on this page, or as HTML here. Finally, BusinessWeek did a report on buybacksback in 2002, "The Buyback Boomerang":

"Some critics believe the buyback frenzy was nothing more than executives seeking to maximize their own wealth. 'They boost the price in the short term and then sell their shares,' says Kathleen M. Kahle, a University of Pittsburgh finance professor and author of the February, 2002, study When a Buyback Isn't a Buyback. Kahle found that the higher the percent of in-the-money options held by top brass, the more likely the company was to execute a buyback plan. The cycle of issuing options--and offsetting shares once options were exercised--pushed share prices ever higher and fed the stock market bubble. . . .

"In the '80s and '90s, the mere announcement of a buyback would give a stock a 3% to 4% pop without spending a cent. Now, such signaling is likely to backfire, says Merrill's Plohn. Companies that announce a buyback but never follow through on it risk creating a credibility problem with investors. 'It looks like you were just trying to hype the price of the stock,' says Plohn.

"Investors must realize that they can't take buybacks at face value. Many repurchases have been little more than costly attempts to jack up share prices and enrich execs. Ultimately, the only reliable driver for share prices is profits."

If the hope was to inspire confidence, The Register says it hasn't worked so far. puts its spin on it. And TechWeb adds:

"To date, SCO's legal challenges have failed to bring much financial gain. The company reported a net loss of $2.3 million in the first quarter ended Jan. 31 on declining revenues of $11.4 million. Only $20,000 came from its Linux licensing initiative.

"While there is no evidence Microsoft is bankrolling SCO's legal battles, there's little doubt as to Linux's growing strength in the market for servers, which are computers used to run business software.

"Unit shipments of Linux servers increased 52.5 percent in the fourth quarter of 2003, compared to the same period the prior year; and revenue from the operating system jumped 63.1 percent to $960 million, according to International Data Corp. Unit shipments and revenue from Windows servers also increased."

And just so we can follow the bouncing ball in this never-boring story, here are some urls from the past on the BayStar deal:

You'll recall this story from December on the revised terms:

"The agreement between the software maker and its lawyers for the high contingency fees has raised many eyebrows in the banking and high-tech industries.

"The filing stated that SCO cannot be sold 'without first obtaining the consent of the private placement investors holding at least two thirds of the shares of SCO's outstanding Series A Convertible Preferred Stock.'

"The filing explained that 'SCO's agreement with the law firms provides that the law firms will receive a contingency fee of 20 per cent of the proceeds from specified events related to the protection of SCO's intellectual property rights. These events include settlements, judgments, licensing fees, subject to certain exceptions, or a sale of our company during the pendancy of litigation or through settlement, subject to agreed upon credits for amounts received as discounted hourly fees and unused retainer fees and may include issuances of SCO equity securities.'

"According to a filing Monday by the SCO Group, RBC and BayStar now have veto power over any SCO action that would trigger the 20-per-cent payment to SCO's attorneys at Boies, Schiller & Flexner LLP."


Bob Mims of the Salt Lake Tribune dangles another possible motive for the buyback in front of us:

"SCO parent Canopy Group, and its CEO Yarro, together own nearly 11 million, or 76 percent of SCO common shares, according to the U.S. Securities and Exchange Commission. Knowing that, Jenson speculated the buyout could be a precursor to taking SCO private."

Going private would, of course, mean no more SEC filings would be required. Can that 76% figure really be accurate?

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