[ale] SCO Announces Intellectual Property License for Linux (fwd)

[John Marasco]

>I'm not normally a conspiracist anymore but out of curiosity, is there
>any way to find out exactly what ties M$ has to SCO?  The whole, sco
>sues IBM and goes after Linux thing just seems to be the type of thing
>which would just make them way too happy.
>
>  
>
The Microsoft licensing deal with SCO was widely publicized and there 
was a $10 price placed on the transaction.

http://www.internetnews.com/ent-news/article.php/2208691
http://www.aspnews.com/news/article/0,,4191_2208691,00.html
http://itmanagement.earthweb.com/entdev/article.php/2208691
http://www.enterpriseitplanet.com/networking/news/article.php/2209371

Examine the SCO Quarterly Income Statements and Balance Sheets (see the 
attached cliff notes) to see the impact of that $10.  Notice the Cash & 
Equivalents is falling for three straight quarters and then suddenly 
rebounds to $10.  The revenue suddenly increases too after holding 
steady for four quarters.  Operating expenses, receivables and total 
liability remain roughly constant tending to downplay the likelihood of 
some sort of business practice change.  SCO had been loosing money at a 
rate of around $1-$6 per quarter and with cash reserves down to $5.  
That trend wouldn't leave many quarters left.  SCO was slowing the rate 
of capital loss but it looks like they were doing so by slashing R&D 
(from 4.2 to 2.5), Selling/General/Admin. Expenses (10.4 to 7.9) and the 
Cost of Revenue (5.5 to 2.9 although there is an uptick in this field in 
the latest quarter perhaps reflecting the cost of the deal with MS?).  
SCO went from 122 employees in Oct 99 to 545 in Oct of 01 and then was 
at 340 in Oct of 02.  I'll bet that a lot of those cost cuts in R&D, 
Sales and Admin were a result of downsizing.  The question is, did they 
need those people or was management just stupid in hiring in the first 
place?  If they needed the people then those cuts will hurt future 
growth and all the cuts did was prolong the failure.  If SCO didn't need 
those employees then management has trouble forecasting and that too 
isn't a strong indicator that the company will do better going forward.  
In either case the "MS licensing deal" was a very big financial push for 
SCO and you can't wage a legal battle without hiring lawyers or finding 
lawyers that will work for commission (or stock).  One billion dollars 
was over 68 times the entire value of SCO at the time the lawsuit was 
first proposed and it is still almost six times SCO's market cap.  The 
market doesn't think the lawsuit has a chance or the stock would reflect 
the new corporate value.  Hell, if the lawsuit goes though I would 
borrow 175 mil to buy a company with 1 bil in cash.  Given that 
investors don't think much of the lawsuit and/or potential revenue 
stream (5 million worldwide Linux users times $700 = 3.5 bil), why did 
Microsoft license this technology?  Does Microsoft know something about 
the lawsuit that the rest of us do not (if so, why) or do most investors 
(Janus, American, Vanguard, Neuberger to name a few big ones) just not 
have access to competent legal council?  With stakes so high and 
potential return so great you have to believe that the large investors 
have scoured the legal issues and the facts show one of two things:

1) Investors (on average) don't think the IP has anywhere near the value 
that SCO does.
2) Some investors think the IP has the value SCO says it does and many 
more think the lawsuit has another purpose other than financial gain for 
SCO.

If you look at the institutional owners of SCO stock you will find that 
the largest owner's (Whitney Asset Management LLC with 1.41% of 
SCOX) second largest holding is Microsoft stock (1.569% of the total 
portfolio).  I don't think this is a relevant connection.  There is no 
listing of private owners of SCO stock so no real angle here.

The lawsuits do coincide with a recent shift in Microsoft marketing 
strategy against Linux.  The new strategy uses "concrete" business 
definable reasons that MS OS products are superior to Linux.  The recent 
security findings by the ISO as well as the Total Cost of Ownership 
comparisons and the comparative times to fix security vulnerabilities 
are all examples of Microsoft's recent attempts to quantify the 
distinctions between the OSs.  Microsoft is now adding questions about 
IP ownership to that list.

The lawsuit and questions raised by SCO fit with Microsoft's latest 
marketing strategy...
Microsoft doubled SCO's cash reserves by complying with a claim that 
based on stock valuation and revenue generated most investors and 
businesses don't find credible...

3 Months Ending 4/30/03
        Total Revenue 21.4
        Total Operating Expense 16.4
        Net Income 4.5
        Cash & Equivalents 10.0
        Total Receivables, Net 8.8
        Total Liabilities 24.3
3 Months Ending 1/31/03
        Total Revenue 13.5
        Total Operating Expense 14.3
        Net Income (0.7)
        Cash & Equivalents 4.9
        Total Receivables, Net 9.5
        Total Liabilities 25.9
3 Months Ending 10/31/02
        Total Revenue 15.5
        Total Operating Expense 18.0
        Net Income (2.7)
        Cash & Equivalents 6.6
        Total Receivables, Net 8.6
        Total Liabilities 29.2
3 Months Ending 7/31/02
        Total Revenue 15.4
        Total Operating Expense 19.6
        Net Income (4.5)
        Cash & Equivalents 9.6
        Total Receivables, Net 11.0
        Total Liabilities 30.8
3 Months Ending 4/30/02
        Total Revenue 15.5
        Total Operating Expense 21.9
        Net Income (6.6)
        Cash & Equivalents 21.8
        Total Receivables, Net 6.3
        Total Liabilities 31.4

* most  dollars figures given in millions.

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