SCO's Suit: A Match Made in Redmond?

Just as the legal battle over Linux was about to become even more expensive, Microsoft suggested that a hedge fund invest in the outfit

For months, rumors have swirled around the Web alleging that Microsoft helped finance a small Utah software company's suit against IBM and two corporations that use Linux software. BusinessWeek has learned that Microsoft (MSFT ) did not put up the money, but did play matchmaker for SCO Group (SCOX ) and BayStar Capital, a San Francisco hedge fund which made a $50 million investment in SCO last October.

Lawrence Goldfarb, managing partner of BayStar, says that senior executives at the software giant had telephoned him about two months before the investment. Would he be interested in investing in SCO, they asked? Goldfarb wouldn't identify the executives, but says neither Chairman William Gates nor CEO Steve Ballmer were among them. He says Microsoft didn't put any money into BayStar or the SCO investment. A Microsoft spokesman says that the company has no "direct or indirect" financial relations with BayStar, but declined to comment when asked whether execs called BayStar to suggest investing in SCO.

No tech company has ever managed to make as many enemies in as short a time as SCO, which has picked a fight with the entire Linux community (see BW, 2/2/04, "The Most Hated Company In Tech"). Based in Lindon, Utah, SCO says it inherited control of the original Unix computer server software developed at Bell Labs more than 30 years.


  When CEO Darl McBride took control of the floundering company two years ago, it was struggling to sell both Linux software -- which he now claims infringes on SCO-owned intellectual property -- and specialized Unix software that runs on microprocessors made by Intel (INTC ). McBride saw the old Unix technology as a way out, and tiptoed into a program that would license SCO's technology to Linux customers and other tech companies.

The industry reaction to the licensing program was at best tepid, and SCO filed a lawsuit against IBM (IBM ) -- claiming damages that are now up to $5 billion -- in March, 2003. On March 3, 2004, SCO upped the ante, filing suit against two big corporate users of Linux software, AutoZone (AZO ) and DaimlerChrysler (DCX ).

SCO has a fourth suit pending against fellow Utah software maker Novell (NOVL ), claiming that Novell is interfering with SCO's business by publicly arguing that it, not SCO, is actually the owner of the intellectual property that's the basis of SCO's claims.


  SCO would have had difficulty paying for its varied litigation without the BayStar funding. BayStar is a hedge fund that manages an estimated $400 million. In essence, it's almost a miniature version of Warren Buffett's Berkshire Hathaway. It has invested in more than 300 companies since it was founded in 1998, mostly in life sciences. About 27% of its investments last year were in software. And it specializes in financing for companies that are already public.

So where does Microsoft come in? Linux, a computer operating system, threatens Microsoft's Windows dominance. Microsoft was also one of the first companies to buy into SCO's licensing program, taking two licenses from SCO worth more than $12 million, according to sources close to SCO. Other big tech companies, including Sun Microsystems (SUNW ) and Computer Associates International (CA ), have also bought licenses from SCO.

Linux enthusiasts have long fretted that Microsoft is an unseen hand behind SCO's suits, a charge both companies deny. But a memo from an SCO consultant to SCO executives that was leaked to Linux advocate Eric Raymond added plenty more fuel to the fire.


  Raymond posted the e-mail -- a grammatically and factually jumbled memo that seemed to claim direct Microsoft involvement in SCO -- on the Web on Mar. 2. An SCO spokesman confirmed the e-mail was real, but said the consultant misunderstood Microsoft's involvement.

Goldfarb's latest revelations don't provide a smoking gun, but they will undoubtedly add more grist for the suspicions of Linux enthusiasts who believe Microsoft is pulling out the stops to curb adoption of their beloved software.

By Jim Kerstetter in San Mateo, Calif.

Edited by Douglas Harbrecht

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