SCO Keeps on Ticking

How the software company embroiled in a multiyear legal tussle with IBM manages to stay afloat even as all signs point to eventual defeat

The SCO Group is something of a tech-industry piñata, regularly taking a pummeling from foes amid an audacious intellectual-property lawsuit against IBM. But it has shown a remarkable ability to survive without bursting apart.

The latest whack: a court ruling by Magistrate Brooke Wells, of the U.S. District Court in Salt Lake City, who dismissed about two-thirds of the claims SCO had made against IBM (IBM). Soon after the decision was made public on July 3, many observers were quick to predict doom for SCO, which in 2003 accused IBM of illegally sharing SCO software with members of the Linux open-source community (see, 2/2/04, "The Most Hated Company In Tech").

But, in fact, any celebrating by IBM and its allies in the open-source software community would be premature. That's because SCO keeps finding investors willing to keep it supplied with the cash it needs to press the case to a conclusion.

Even though SCO spent nearly $4 million last quarter on legal expenses, it still has $18 million in the bank. Late last year it raised $10 million in a private placement from a handful of institutional investors, led by Glenhill Advisors, which now has a 10.2% stake in the company. "We believe we have enough money to see the case through," says an SCO source. "If we need to raise money again, our existing shareholders are willing and ready to do it." Glenn J. Krevlin, the managing director of Glenhill, did not return a call requesting comment.


  It's not clear if the money SCO has now will carry it through the trial or any appeals process. SCO paid fees in advance to its outside counsel, Boies, Schiller & Flexner, but other legal costs keep racking up. For instance, last quarter it spent nearly $3 million alone on technical experts for the case. SCO Chief Executive Darl McBride said during the company's second-quarter earnings conference call in June that the discovery phase of the case was concluding. "We feel like we're reaching the home stretch," he said, even as the company put $5 million into an escrow account to cover legal expenses.

Analysts believe SCO could be doing a better job of husbanding its resources. It continues to spend millions of dollars a year developing new products, such as data communications software for mobile phones and PDAs, and entering new markets, in spite of the fact that its revenues are declining sharply—brought down by customer concerns over its viability. Revenues in the second quarter dropped to $7.13 million from $9.26 million a year earlier.

"They should focus on the litigation and cut out other distractions," says analyst Rob Enderle of tech market researcher Enderle Group. "Their business is litigation. If they lose, they're done." Enderle at one time believed that SCO had a good chance of winning its case, but now is skeptical.


  It's hard not to be when you read the magistrate's 39-page ruling. Wells sharply rebuked SCO for not providing enough information about its claims. "Given the amount of code that SCO has received in discovery, the court finds it inexcusable that SCO is, in essence, still not placing all the details on the table," she wrote.

Analysts called the ruling a serious blow to SCO's prospects of winning in trial. The ruling allows IBM to focus on a much smaller subset of issues, rather than wasting time on issues that won't be relevant. "We were skeptical from day one, and, as it goes on, we feel even more certain that they're likely to lose their challenge," says analyst Laurent Lachal at market research firm Ovum.

IBM wouldn't comment on the magistrate's ruling. SCO spokesman Blake Stowell said: "Our lawyers are reviewing the ruling and will determine next steps in the near future." Unless those steps include providing more evidence of wrongdoing by IBM, SCO's investors may soon be wondering if they should keep doubling down on their bets.

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