Shares in Unix vendor SCO Group plunged over 70% to open at just $0.45 on Monday, valuing the company at under $10m and making it a prime takeover target following an adverse legal ruling.
The company’s share price had closed at $1.56 on Friday ahead of a court ruling that Novell, and not SCO, was the rightful owner of the copyrights for the Unix operating system. The price remained steady in early trading, however, valuing the company at about $9.5m.
That value can be expected to drop further if SCO incurs further losses as Novell’s counterclaims go to trial in mid-September, particularly as it is decided exactly how much SCO owes Novell from the licensing agreements it struck with Microsoft and Sun.
Those agreements generated $25.9m in revenue for SCO in early 2003 and helped finance its breach of contract claim against IBM. Last week Judge Dale Kimball ruled that under the terms of an agreement between Novell and SCO’s predecessor, SCO owed Novell a proportion of that revenue to be decided at trial.
Novell had asked for a summary judgment that it was entitled to 100% of the revenue minus a 5% administration fee and for the money to be placed in a constructive trust in case SCO spent the money before Novell could get its hands on it.
Judge Kimball ruled however that there was doubt as to what portion of the Microsoft and Sun revenues related to System V code, for which Novell has a royalty claim, and how much related to UnixWare code, to which it does not.
How much of the $25.9m revenue Novell is entitled to will be decided at trial and could have an adverse affect on SCO’s ability to remain in business given its current financial position. According to the company’s most recent financial filing its cash and equivalents and restricted cash totaled $13.2m at the end of April, while it had total assets of $19.9m.
It remains to be seen how Sun and Microsoft will respond to the news that SCO did not own the Unix copyrights it apparently licensed from SCO, while investors behind the $60m raised by SCO since it made its legal claims could also come looking for a refund.
While SCO has expanded its focus to mobile infrastructure software in recent years its dwindling Unix business is still its most valuable asset and is the most likely reason the company’s share price has not dropped even lower.
The company’s products revenue was $4.9m in the quarter ended April 30, 2007, down from $5.7m in the comparable quarter last year and $13.1m in the same quarter in 2003. While SCO’s Unix business was in decline even before it started its legal campaign the Unix business could still attract takeover bids that increase the company’s overall value.
The fact that Novell retained rights over the original Unix System V code base while selling the associated operating system business helped complicate matters considerably and it would be in the interests of Unix and Linux vendors to have that code owned by a friendly party.
The most obvious solution would be for Novell to step in and acquire SCO as part of a settlement, but the given the company’s transition away from proprietary operating systems towards Linux, owning a Unix distribution is probably the last thing that it wants.
If IBM wanted to acquire SCO to either get rid of its legal claims or pick up its Unix business it could have done so for pocket change many years ago. Instead the company has indicated it wants to see the legal process through to its conclusion.
If SCO’s share price continues to drop, however, either Novell or IBM may find that they have no option but to make a move for SCO, however, if only to keep its Unix business out of the hands of others.