Update: Microsoft behind $50M SCO investment

Microsoft "introduced" SCO to the investment fund, a SCO official says

Executives from Microsoft Corp. introduced The SCO Group Inc. to an investment fund that provided the Lindon, Utah-based company with a $50 million investment last October, a spokesman for the fund said today.

Microsoft executives talking to BayStar Capital suggested the investor look into SCO as an investment opportunity, said Bob McGrath, a BayStar spokesman. "BayStar was introduced to SCO by executives at Microsoft," McGrath said. "We talk to individuals all the time about investment."

Blake Stowell, a SCO spokesman, late today confirmed that BayStar was introduced to SCO by Microsoft executives, saying "I believe it's correct." But, he said, other than introducing the two parties, "that's certainly the extent of the interaction or relationship that took place there.

"There were a number of different companies that SCO could have gone to for investments, but it just so happened that Baystar was the one selected" after the initial introductions took place, Stowell said.

SCO claims that the Linux operating system contains code that violates its intellectual property rights, and it has launched lawsuits against IBM and Novell Inc. in connection with those claims.

Microsoft, whose Windows operating system monopoly is threatened by Linux, has paid SCO in the past. A 2003 Unix licensing deal between the two companies earned SCO $16.6 million last year, according to U.S. Securities and Exchange Commission (SEC) filings.

Microsoft's role in the BayStar financing, however, had been unknown until recently. It first came to light last week, when open-source advocate Eric Raymond published an e-mail written by Mike Anderer, a consultant at SCO contractor S2 Strategic Consulting LLC that appeared to suggest that Microsoft had funneled as much as $86 million into the company

"Microsoft also indicated there was a lot more money out there and they would clearly rather use BayStar 'like' entities to help us get signifigantly [sic] more money if we want to grow further or do acquisitions," the e-mail said.

SCO confirmed the authenticity of the Oct. 12, 2003, e-mail but dismissed its contents (see story).

"We believe the e-mail was simply a misunderstanding of the facts by an outside consultant who was working on a specific, unrelated project to the BayStar transaction. He was told at the time of his misunderstanding," a SCO spokesman said last week.

While he did not find it surprising that Microsoft had not made a direct investment in BayStar, Raymond speculated that the SCO investment probably involved "an unspoken quid pro quo that would be difficult to verify," on the part of Microsoft.

"They're admitting the most innocuous parts of the truth in the hopes that no one will press them to disclose the really juicy stuff," Raymond said today, suggesting that more disclosures on the relationship between Microsoft and SCO could emerge should SCO be investigated by the SEC.

So far, Microsoft's investment tip has not proved to be a good one. BayStar purchased stock in SCO for $16.93. With SCO's stock trading at $9.66 today, that means BayStar's initial $50 million investment is now worth $28.5 million.

Mark Martin, a Microsoft spokesman, declined to comment on specific questions about the matter, but read a prepared statement from the company which said that "Microsoft has no direct nor indirect financial relationship with BayStar."

Computerworld's Todd Weiss contributed to this report.

For more on SCO's Linux fight, head to our special coverage page.


Copyright © 2004 IDG Communications, Inc.

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