Bank walks away from SCO investment

The Royal Bank of Canada is walking away from a $30m investment it made in the SCO Group last October.

The Royal Bank of Canada is walking away from a $30m investment it made in the SCO Group last October.

The Royal Bank sold off its SCO holdings in two financial transactions.

"We've unwound our position," said Paul Wilson, a spokesman for the Royal Bank's Capital Markets group. He declined to comment on why the Royal Bank had sold the stock.

Ironically, two-thirds of the Royal Bank's SCO stock was sold to BayStar Capital, the investment firm that was the other investor in the October deal, which totalled $50m, after it was introduced to SCO by Microsoft.

In April, BayStar accused SCO of breaching parts of its investment agreement, and asked that its $20m share of the deal be returned.

A BayStar spokesman declined to say what his company had paid for the 20,000 shares of SCO preferred stock it purchased this week from the Royal Bank, or why BayStar would purchase stock in SCO just one month after asking for its money back.

"The timing and price of our purchase of [the Royal Bank of Canada's]  holdings in SCO presented a strategic and financial opportunity for BayStar and its investors," he said.

BayStar has had concerns over SCO's "failure to take the appropriate steps to leverage the intellectual property asset that they have", the spokesman said. But, he added, "we continue to believe that there is a valuable IP asset in SCO and that it is one that could generate a return for all the shareholders of the company."

The Royal Bank's other 10,000 shares are being converted to 740,740 shares of SCO common stock at the rate of $13.50 per share, which means that the Royal Bank paid more than twice the current value of SCO's common shares. On Friday afternoon, SCO common shares were trading at $5.90.

This means that the Royal Bank will, most likely, take a loss on the deal, said Dion Cornett, an analyst with Decatur Jones Equity Partners.

The Royal Bank's moves will put pressure on SCO's stock price, make it difficult for SCO to raise future funds, and the fact that BayStar has acquired more SCO stock may even be an indicator that the investment company is planning legal action against SCO.

"It's bad news for SCO on three fronts," Cornett said. Ownership of more shares in SCO, for example, might give BayStar greater standing in a possible lawsuit against the company.

SCO downplayed the effect of the Royal Bank's actions. "It really has no impact from a financial standpoint because the $50m investment continues to reside with SCO," said SCO spokesman Blake Stowell.

SCO claims that Linux violates its IP, and has become involved in lawsuits with IBM, Novell, Red Hat and two Linux users in connection with these claims.

Robert McMillan writes for IDG News Service

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