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Why, BayStar? Why?
Tuesday, April 20 2004 @ 08:02 AM EDT

Decatur Jones' Dion Cornett says he does "not believe BayStar would request redemption if its hopes of a legal victory had not turned decidedly negative." Cornett is patting himself on the back for his longstanding "Underperform" rating on SCO, as he has every right to do. He stood alone against Brian Skiba's extraordinary $45 nonsense, and now it's only normal for him to point out who was right.

His Open Source Wall Street newsletter for April 19, 2004 has an interesting nugget of information. He indicates that BayStar's decision might be because of a number of items, including improper review of a press release. Significantly, SCO is not releasing the letter to the media, according to ComputerWeekly. If BayStar's decision is based on improper review of a press release, I think ComputerWeekly's headline probably captures the truth: "SCO Invester Seeks Way Out of Deal."

eWeeks' Steven J. Vaughan-Nichols has more:

"Dion Cornett, managing director at Decatur Jones Equity Partners LLC, an independent equity-research firm focused on small to midsized growth companies, said, 'I can't get inside BayStar's brain, but I think they're pulling out because they no longer believe SCO is a good investment.'

"Stacey Quandt, principal analyst at Quandt Analytics, said she agrees. 'The implication is that BayStar thinks SCO will not succeed with its case.'

"Cornett continued, 'I can't believe they're doing this just because of a press release [one of BayStar's purported claims against SCO]. I don't know what spooked them, but based on the timing, it might have been because IBM had just filed for summary judgment.'

"Quandt added, 'When you look at SCO's situation, maybe BayStar has decided to cut their losses.'"

Here's some more from Cornett's Open Source Wall Street, who believes RBC may be next, as does OSDN's Melanie Hollands. He says Sun is still not committed to open source, he has some figures from IBM, and he predicts MS's DRM strategy will fail as a tactic against open source:


Open Source Wall Street, April 19, 2004, Dion Cornett:

One-two punch to SCOX validates thesis

The SCO Group (SCOX: Underperform) shares were down 21% last week, as IBM Corporation (IBM: not rated) indicated its intent to ask for summary judgment and SCOXís lead pipe investor, BayStar Capital, asked for its money back. We highlighted both developments in notes last week. In summary, we do not believe BayStar would request redemption if its hopes of a legal victory had not turned decidedly negative (purported reasons included items as minor as improper review of a press release). In general, it is difficult for private equity investors to force redemption. However the threat is sometimes used to negotiate better terms, or possibly the claim of breach may sit better with a fundís limited partners than does poor investment judgment. If BayStar intends to get its money back, then a lengthy court battle is likely. Worse case for SCOX would be if BayStar obtained an injunction to freeze funds in the interim. In this event, we would expect RBC (another investor) to follow suit, thereby denying SCOX of funds needed for Linux litigation. However, we believe an injunction will be difficult to obtain and thus would not be surprised if SCOX rebounds a bit from current levels below $8 before eventually moving lower. . . .

IBM credits Linux for growth in various areas

IBM reported results last week and specifically credited Linux as a success factor in a number of areas ranging from its Z-Series line of mainframe computers to its X-series servers, whose revenues were up 34% and 28% year-over-year respectively. We expect some of IBMís March-qtr success to be reflected in April-qtr and May-qtr results for NOVL and RHAT. NOVLís SuSE Linux is generally shipped on IBMís high-end machines, RHAT on the low-end. Separately, IBM reported that revenue from blade computing doubled year-over-year, good news for CTXS, whom we believe will benefit from the improved density and price-performance blade servers offer.

SUNW still not committed to Open Source

Sun Microsystems (SUNW: not rated) reported results for 3Q04 as well last week. Based on management comments, we believe SUNW remains overly focused on SPARC and Solaris and may not move as quickly towards software and Open Source in particular, as the appointment of Jonathan Schwartz to President and COO may have suggested. We believe SUNW will continue in its efforts to bring Solaris up to par with Linux on x86, a challenging task given the broad support Linux receives. Nonetheless, SUNW continues to drive the robustness and viability of Open Source through its contributions to projects such as OpenOffice, Mozilla, GNOME, JXTA, Jini, and Apache (Tomcat).

MSFT settlement with InterTrust another potential hurdle for Linux

Microsoft Corporation (MSFT: not rated) settled Digital Rights Management (DRM) patent claims this past week with InterTrust for $440 million. Some observers have speculated that the agreement provides MSFT yet another tool in its battle against Open Source Software. However, we believe any attempt to use DRM to lock-in customers to protected solutions would backfire. More specifically, if Windows technology were modified so that only properly-licensed content would run, we believe additional users would be pushed to open software, not wanting to have their hardware and operating system police their actions.

Miscellaneous data points

In final tidbits, several news stories have criticized last weekís pro-Windows Yankee Group study for its uncovered connection to a prominent MSFT partner. Samsung is upping its commit to Linux in numerous new devices and is leaning towards the operating system as its preferred choice. Wind River (WIND: not rated) signed a strategic agreement with National Instruments (NATI: not rated) thus helping to drive Linux into the industrial automation market. Note that MSFT has gained considerable market share in industrial automation over that last several years (a segment we used to cover in detail), and that we the WIND announcement as yet further evidence of Linux encroaching into additional MSFT markets.

More doom predicted everywhere. Steven J. Vaughan-Nichols noted the irony of SCO being accused but not being told the exact offense, and he got this funny reaction from Linus: "Yeah, my heart really goes out to them." There is also this from ICD analyst Dan Kusnetzky, also on eWeek:

"Dan Kusnetzky, IDC vice president of system software, said he thinks SCO 'will find itself embroiled in another legal contest.'

"'As an industry analyst, SCO needs customers, particularly big ones, and [it has sent] 1,500 letters threatening legal action, which is not a way to engender friendship,' Kusnetzky said.

"'SCO also need hardware backers, and they've sued IBM, and HP has set up legal protection for its Linux customers against SCO legal actions. They've upset many customers and many of their partners, and that's not the equation for success.

"'In the long run, if you look at the stream of revenue shrink and the cost of litigation rise, it's hard to see how SCO can long continue.'"

The last straw is that SCO has its shareholders' meeting today. Some speculation for those of you who speak German here. I think. Babelfish has quite a time with this article. If any of you happen to be shareholders and are attending the meeting, do report events, will you please? Here is Sherlock's translation of the first part of the article:

"With voltage the shareholder meeting of the SCO Group is expected, which is set for today's Tuesday. While the conference order registers the usual points such as report on the situation and selection or acknowledgement of the management, there are signs that the shareholders will require in view of a desolate share quotation restructuring.

"The business model to over possibly obtain with 'IP licenses so mentioned' (Intellectual Property) from juridical insecurity produced by SCO in Linux taken over source code from Unix stocks incomes turned out as flop."

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