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The Inevitable Stock Surge For "a Company in Decline"
Thursday, January 20 2005 @ 06:20 PM EST

Naturally, SCO's stock has surged. The stock has leaped on the news that IBM has to turn over more code. Since IBM's position is that SCO won't find anything no matter where they look, it's a puzzlement, until you look at their reasons.

TheStreet.com asked a SCO long to comment:

Calling the order a "homerun for SCO," one buy-side investor who is long SCO said he believes the order this week requiring IBM to produce more information puts added pressure on the company to settle. It also postpones any potential dismissal of the case by the judge in response to IBM's request for summary judgment, said the source, who asked to remain anonymous.

In other words, they like it that they think IBM is being pressured to settle (in the long's dreams) and they like it that it will take longer to have the case dismissed. What does that tell me? It sounds to me like they know the case will ultimately be dismissed or lost, that they think SCO has no leg to stand on ultimately, but they can make some fast money from an annoyance lawsuit one way or another before it is settled or dismissed. They don't seem to be anticipating a win. They would be right about that, in my opinion. But if some people can skim some easy money off this lawsuit, they are thrilled to do it. I'd ask to remain anonymous myself if that was how I made my money.

Lots of crowing going on on Wall St. perhaps, but interestingly, SCO's Blake Stowell refused to comment for the Salt Lake Tribune's Bob Mims. And instead of commenting, the company merely put out a vague statement:

"SCO is pleased with the court's order and we look forward to obtaining this important discovery so we can continue with our preparation for trial," the company said in a statement. Executives from both SCO and IBM weren't available for comment.

So I gather they know precisely how much this matters in the end and are laying low.

Meanwhile, Forrester says SCO, as a software company, is a company in decline, and even if they were to win the litigation, it won't be enough to prevent the end, not unless they can really make some money in 2005 to reverse their death march. Their analysis of SCO's future prospects in "Is SCO Toast? All Signs Point To Yes" is that it hasn't got much of one, unless they can seriously increase their business fast. They are, they say, a company in decline, and even if they win the litigation lottery, that will merely extend their goodbye as a software company into a long goodbye. Here's their summary:

SCO's most recent quarterly financial results indicate a continued erosion of its software business and a failure of its IP licensing program to generate significant revenue. Absent a dramatic reversal of fortune through its litigation efforts, SCO is a company in decline. Thus, Forrester reiterates its recommendation that Linux users not panic over the SCO litigation program, and that customers look for alternatives to SCO software.

They note that SCO says they now have "a stable revenue" from their software business, but Forrester says that isn't enough to save them. Customer confidence has plummeted, and there are viable alternatives, like Linux. SCO is distracted by its litigation and even a win wouldn't reverse SCO's increasing irrelevance as a software supplier. With Linux growing so fast, and customer confidence shrinking, flat business means a decline in mindshare, they say. Their recommendation is to look to alternatives.

So, SCO is now an annoyance lawsuit. That is their business? There is a lot of talk about capping damages in personal injury lawsuits. Maybe it's time to think about preventing IP annoyance lawsuits. I see they are tons of fun for Wall Street's conscienceless players, but what about the rest of us? What about innocent companies forced to endure an experience like IBM's? No one, not even the SCO longs apparently, thinks IBM will lose. Their chief hope from the beginning, as far as what they expressed publicly that I've read, have been pinned on IBM being so harrassed they decide to settle. That dream of theirs didn't come true and it won't. But their other hope is that they can make money on the stock the longer this goes on, and some are. There really is something wrong with a system like that.

Dion Cornett got it right, when TheStreet.com asked him for his reaction:

Decatur Jones analyst Dion Cornett, the only sell-side analyst who still follows SCO, called the discovery order handed down this week SCO's "biggest win to date."

"They basically have the right to go on a fishing expedition to try to prove their case," said Cornett, who has a market perform rating on SCO.

But if your biggest win is a discovery order, you are in big trouble.


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