Microsoft Corp’s involvement with SCO Group Inc’s legal claims against Linux is again back in the spotlight thanks to a court filing that indicates Microsoft offered to guarantee a $20m investment in the Unix vendor.
According to a declaration by Larry Goldfarb, managing general partner at former SCO investor BayStar Capital II LP, a Microsoft employee promised to guarantee the investment firm’s 2003 funding of Linden, Utah-based SCO.
Mr Emerson and I discussed a variety of investment structures wherein Microsoft would ‘backstop’ or guarantee in some way, BayStar’s investment, declared Goldfarb, according to IBM’s memorandum to support its motion for summary judgment on SCO’s claims that IBM interfered with its business.
Goldfarb was referring to Microsoft’s former senior vice president of corporate development and strategy, Richard Emerson, who was hired by Microsoft in 2000 to lead corporate development activities, including mergers, acquisitions, and partnerships, and reported directly to Microsoft chief executive, Steve Ballmer, according to reports.
Emerson was linked to BayStar’s investment in SCO in March 2004 when an email was published by open source guru Eric Raymond that linked Microsoft to BayStar’s investment in SCO.
Called the Halloween X document by Raymond, the email was sent to SCO’s vice president and general manager of SCOsource, Chris Sontag, by Mike Anderer, CEO of SCO consultant S2 Partners LLC, and discussed the potential for SCO to raise money from Microsoft via neutral third parties.
BayStar is easy as they were just a Microsoft referral, the email said. I realize the last negotiations are not as much fun, but Microsoft will have brought in $86m for us including BayStar.
The email went on: Do keep in mind that they have brought us between $82m and $86m if this deal is between $4m per quarter where Rich is at, with Raymond suggesting in his analysis that ‘Rich’ probably referred Richard Emerson.
Suggesting SCO would seek additional Redmond funding, the email added: Microsoft has also indicated there was a lot more money out there and they would clearly rather use BayStar ‘like’ entities to help us get significantly more money if we want to grow further or do acquisitions.
A BayStar spokesperson told ComputerWire later in March 2004 that: Microsoft executives contacted BayStar to introduce SCO as a potential investment opportunity, while Microsoft simply maintained that there was no financial relationship between itself and BayStar.
By that stage, it appears there was little relationship of any kind between Microsoft and BayStar. According to Goldfarb’s declaration, Microsoft stopped returning my phone calls and emails, and to the best of my knowledge, Mr Emerson was fired from Microsoft.
According to a September 2003 report in the New York Times, Emerson resigned from Microsoft and left on August 30, 2003, about six weeks before SCO announced $50m in funding from BayStar and Royal Bank of Canada.
The declaration details were included with IBM’s memorandum to support its motion for summary judgment on SCO’s seventh, eighth, and ninth causes of action and specifically refers to SCO’s claim that IBM persuaded BayStar to end its investment with SCO.
In his declaration Goldfarb denied this was the case. BayStar terminated its relationship with SCO for multiple reasons. BayStar’s decision to terminate its relationship with SCO had nothing whatsoever to do with any communications with or conduct of IBM, he stated.
According to Goldfarb, BayStar pulled out of the deal because of concerns over SCO’s share price performance, its cash burn rate and the performance of its Unix product business, as well as Microsoft’s apparent about-face.
The investment firm agreed in June 2004 to sell its 20,000 shares of Series A-1 convertible preferred stock as well as a further 20,000 shares it acquired from fellow investor Royal Bank of Canada in May 2004, for just $13m in cash and just over two million shares of common stock.
BayStar had previously threatened legal action against SCO to have its investment returned and attempted to force the company to change its management and take a more professional approach to its intellectual property claims.
The BayStar and RBC investment arrived at a critical point for SCO and its long running legal case against IBM. The company had worked its way down to cash and cash equivalents of just $14.6m at the end of its third quarter 2003.
The investment boosted that cash reserve to $61m, helping SCO to finance its legal battles against IBM, Novell, Red Hat, AutoZone, and DaimlerChrysler.