BayStar Capital LP and The SCO Group Inc. have agreed to a deal under which BayStar recoups some of its investment in SCO and the Unix company gets more freedom in running its business.
SCO will buy back all of BayStar's 40,000 preferred shares in the company for $13 million in cash and roughly 2.1 million shares of the company's common stock, it said in a statement Tuesday. The shares represent a value of $10.1 million at Tuesday's closing price of $4.81 for SCO shares on the Nasdaq stock exchange.
As a result of the transaction there will be no more preferred SCO stock outstanding, giving SCO more freedom to make business decisions, SCO spokesman Blake Stowell said.
The preferred shares offer special powers to stockholders, such as the right to a seat on the SCO board and the power to block any acquisition, legal settlement or even payment to SCO's lawyers, Stowell said. However, the preferred shares aren't tradable on the stock exchange, he said.
As part of the deal with BayStar, SCO has also agreed to focus on protecting its intellectual property (IP) and deemphasize its Unix business, according to a source close to the transaction. Additionally, SCO has agreed to keep a lower profile in the media, the source said.
These points reflect BayStar's criticism of SCO about two months ago, SCO's Stowell said. BayStar's concerns about the Unix business and media outreach were part of the negotiations that led to the deal announced Tuesday but were overcome, he said. There are no major strategy changes, Stowell said.
BayStar acquired 20,000 preferred SCO shares when it invested $20 million in the Lindon, Utah-based company last year. BayStar in April said it was looking for a way out of its investment in SCO, but a month later doubled its holdings in the company by buying 20,000 preferred shares from the Royal Bank of Canada (RBC) for an undisclosed sum.
Under the buyback agreement with SCO announced Tuesday, BayStar can sell the common stock but its daily selling may not exceed 10 percent of the average trading volume of SCO shares on the Nasdaq over the preceding five trading days, according to the SCO statement.
The conversion of BayStar's preferred stock into common stock is good news for SCO shareholders, according to Dion Cornett, an analyst with Decatur Jones Equity Partners LLC, an equity research firm based in Chicago. "The company relieves itself of a major disgruntled investor," Cornett wrote in a research note Tuesday.
Although BayStar now has the opportunity to sell its SCO holdings, the investor may hold on to the shares, Cornett wrote.
"While we do not know how quickly BayStar may attempt to liquidate its newly held common shares, we believe that the investment company may be inclined to hold -- awaiting a potential legal victory -- based on recent public comments by BayStar's management," Cornett wrote.
SCO's Stowell also said he does not expect BayStar to start selling off SCO stock. "We believe that they probably plan to hold those shares for the foreseeable future and remain long-term shareholders," he said.
SCO claims that Linux contains code that violates its intellectual property rights and has become involved in lawsuits with IBM Corp., Novell Inc., Red Hat Inc. and Linux users in connection with these claims. Linux advocates have said SCO has yet to prove any of its IP claims and accuse the company of being part of a Microsoft Corp.-backed attack on the open source operating system. BayStar has said it was introduced to SCO by Microsoft.
The investment by Larkspur, California-based BayStar and RBC has been seen as crucial in allowing SCO to pursue its intellectual property battle. SCO spokesman Stowell said that after paying off BayStar, SCO still has enough cash on hand to continue litigating. Cornett estimates SCO has roughly $45 million left in cash to continue its legal battle.