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BayStar Speaks
Thursday, April 22 2004 @ 02:23 AM EDT

The New York Times has the story on why BayStar did a Uturn:

"In an interview Wednesday, Lawrence R. Goldfarb, managing partner of BayStar, explained why his hedge fund originally invested in SCO and detailed for the first time what he regarded as the wayward corporate behavior on SCO's part that led to the recent split.

"Mr. Goldfarb described a company that had become too engaged in publicity and debate with the passionate advocates of the free Linux operating system. SCO's management, he said, was traveling too much and spending too much when it should have been concentrating its efforts and resources on its legal strategy.

"'The real issue for us was spending and focus,' he explained. The public statements from Darl McBride, SCO's chief executive, were too frequent and too grand for BayStar's liking."

I don't know that I'd characterize anything Darl says as "grand", but de gustibus, non disputandum est, as they say. Right or wrong, BayStar says, they made their decision to invest in SCO on the basis of whether they thought Boies could prevail in front of a jury (that old investor's pipedream -- like this case is ever going to reach a jury). Microsoft, they acknowledge, has an obvious agenda, but that wasn't why BayStar invested in SCO. Right. Significantly, Goldfarb indicates it might reconsider if SCO changes its ways:

"For his part, Mr. Goldfarb said that with reforms in management practices to address BayStar's complaints, it might keep its funds in SCO."

Are they asking that SCO get rid of Darl? Or that he mend his ways? Was this all just a grandstand play to get concessions from SCO? Or . . . well, I'm not a stock expert. I'll have to leave stock speculation to others. Is it possible SCO is wanting to get out of the litigation, and BayStar wants to hold them to the original plan?

More details from Mercury News. They do want new people at the helm:

"BayStar Capital Management LLC believes SCO needs to hire executives with more savvy about intellectual property cases and spend less money on its Unix products, BayStar spokesman Bob McGrath said Wednesday."

They also think Darl was being paid too much:

"SCO's chief executive is Darl McBride, whose cash compensation totaled $986,047 in the company's fiscal year ending last October. That pay package troubled BayStar, McGrath said, given SCO's small size - the company has annual revenue of $79 million and about 300 employees."

Does this mean we won't have Darl to kick around any more? The Mercury News reports one more detail: "The investment firm didn't consult with Microsoft before its showdown with SCO." So maybe they are "reconsidering" after hearing from Microsoft? You think?

Stephen Shankland got a reaction from SCO, and they indicate they are sticking with Darl:

"'We think they need to strengthen the senior team to get people with experience and background in the legal issues,' McGrath said. And if SCO addresses BayStar's concerns, the investor is open to reversing its redemption request, McGrath added.

"SCO spokesman Blake Stowell said the Lindon, Utah-based company wants to resolve the issue, but said it's not likely to make the three changes BayStar seeks.

"'We're interested in resolving any issues BayStar believes they have. We're ready to talk when they're ready to pick up the phone,' Stowell said. Regarding a replacement for Chief Executive Darl McBride or other top executives, he said, 'My belief is the members of our board are completely comfortable with the management we have in place now.'"

Let's see how long that defiance lasts. $20 million can be mighty persuasive to folks like that. But they are essentially asking SCO to give up on UNIX and just be an IP litigation company. Goldfarb may not realize it, but if they did, their legal house of cards would take quite a hit, based as so much of it is on damage to their alleged core business, especially in the IBM case. But that is what BayStar wants:

"'We think there are limited prospects of that business ever generating growing and significant revenue,' McGrath said. 'And we believe it is diverting resources from going where they would have the most value--the intellectual property process.'"

Ah, the 90s are back, with that old ka-ching dream of IP millions just from an IP portfolio. No product, no business, just litigation. It just goes to show you, taking other people's money is a good way to lose your independence. BayStar wants what it wants or it will take its marbles and go home. They assume that SCO can't afford to have them do that, so they are now starting to dictate the terms. How ironic. They are making an offer they think SCO can't refuse. Why, that's *SCO's* MO! How positively karmic. Evidently birds of a feather actually do flock together . . . after which, they begin to peck each others' eyes out.

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