BayStar Capital, the investment firm Microsoft
introduced to The SCO Group, is looking for a way out of its $20m
investment in the Unix company.
"We received a letter from BayStar indicating that they believe
that we had breached some sections of the exchange agreement that
we had entered into in February," said SCO spokesman Blake
Stowell.
"They are asking us to redeem their shares based on the
allegation that we've breached their agreement."
SCO declined to provide copies of the BayStar letter, which it
received last week, but claimed that it did not provide specific
information on the alleged breaches.
"There isn't a single person at our company that knows today why
[BayStar] believes we've breached some terms of the agreement,"
Stowell said.
BayStar was the lead investor in a $50m deal first announced in
October 2003 and amended in February. Last month, BayStar admitted
that Linux rival Microsoft had made the introductions that led to
the deal.
The investment has been seen as crucial in allowing SCO, which
posted a $2.3m loss in its most recent quarter, to continue with
its multibillion-dollar lawsuit against IBM over its contributions
to the Linux operating system, and Linux advocates have criticised
it as a proxy investment by Microsoft designed to undermine the
credibility of Linux.
"The lead investor for SCO that had access to all the
information that we wish we had access to, they're asking for their
money back," said Dion Cornett, an analyst with Chicago-based
Decatur Jones Equity Partners.
"And not only are they asking for their money back, they are
basically asserting material breach of representation and
warrantees."
Cornett added that it was unlikely that BayStar would get its
money back, because BayStar's agreement with SCO does not include
contractual terms allowing BayStar to demand redemption.
"This does not jeopardise SCO's ability to pursue their lawsuit
against IBM," he said. "What it does jeopardise is their ability to
get future investors."
The Royal Bank of Canada, which contributed the other $30m to
the February deal is "aware of what has transpired between BayStar
and SCO", and is "looking at the situation", according to Paul
Wilson, a spokesman for the Royal Bank's Capital Markets group.
Wilson declined to comment on whether or nor the Royal Bank
would be asking for its money back. "Right now, the issue is
between BayStar and SCO," he said.
BayStar declined to comment on this story.
Robert McMillan writes for IDG News
Service