SCO Brought Back from the Dead by Middle East Money

Published: February 26, 2008

by Timothy Prickett Morgan

It was a happy Valentine's Day for The SCO Group. With its key Unix guru having just left the company, a dwindling revenue stream for its OpenServer and UnixWare products, three big lawsuits with uncertain outcomes and the consequent mounting legal bills, and operations from within the confines of Chapter 11 bankruptcy, someone has nonetheless decided to plunk down $100 million to take the just barely publicly held Unix software maker private and give it yet another new lease on life.

Amazing, really.

Only a week earlier, SCO had filed its 10K annual report with the Securities and Exchange Commission, saying it probably would not be able to pay its legal bills, and this was only a few months after a bizarre deal under which SCO tried to sell its Unix assets to a third party for $36 million and keep the remaining shell of the company owning the future payoff--if there ever is any--from its lawsuits with IBM, Novell, and Red Hat. That deal fell through, mostly because it made no sense at all and there was no way the bankruptcy court in Delaware or the trial judges in Utah were going to allow such shenanigans.

And that leads us to Stephen Norris & Co Capital Partners , a private equity firm based in New York, and a set of unnamed Middle Eastern backers (who presumably have the real dough) who want to pay $100 million to take over SCO, get it out of bankruptcy, and back in the business of selling Unix software and pursuing those lawsuits against IBM, Novell, and Red Hat.

With all of the tightening of capital right now in the global market and the issues that SCO is facing--particularly the concept of pitching closed source Unix against open source Linux--you have to be asking yourself, "Why?"

"We saw a tremendous investment opportunity in SCO and its vast range of products and services, including many new innovations ready or soon to be ready to be released into the marketplace," explained Stephen Norris, the managing partner at the equity firm that bears his name. "We expect to quickly develop these opportunities and to stand behind SCO's existing base of customers and partners."

Norris is not just the managing partner at the firm, but also its chairman. Pamela Newman, executive vice president of insurer AON Corporation, is on the company's investment committee. Norris was one of the co-founders of private equity giant The Carlyle Group, so you can bet that SNCP has a desire to invest in military contractors as much as other more traditional IT high tech companies. Carlyle was founded in 1987 and has a bunch of political heavy hitters on its board (including former president George H. W. Bush and former prime minister John Major); former IBM chairman and chief executive officer Louis Gerstner is its chairman, and has done a lot of investing in military contractors. Newman has been doing deals with Norris for the past five years, including work with Berkeshire Hathaway, the company controlled by Warren Buffett, and she has been involved in deals with Carlyle, The Blackstone Group, Atlantic Capital Partners, and a bunch of other big equity firms. The other member of SNCP's investment committee is Stewart Paperin, who was the senior advisor to the Soros Fund, operated by philanthropist and multi-billionaire George Soros.

SNCP does not say how large a fund it has from which to draw to make investments, but says that it can do deals up to the $150 million mark. The company's Web site also says it can very quickly commit $50 million to any co-investment opportunity, too, and is one of the few companies that can do this in a timely fashion. Given the connections between Carlyle and the royal family of Saudi Arabia and the fact that oil is now trading at $100 a barrel, it is not too hard to guess who has the big bag of money that can be tapped. Then again, there is no reason why SNCP has to restrict itself to taking investments in funds just from Saudi Arabi. There are plenty of other rich people in the Middle East who live in other countries. The United Arab Emirates are a good example. In his small-print bio at the end of the SCO announcement, it says that Norris invested over $1 billion on behalf of a "prominent Middle Eastern investor" into Citigroup, Euro Disney, and the Four Seasons Hotel, which have returned over $10 billion to that investor. The unnamed investor that Carlyle invested for (with Norris doing the job) was Prince Alwaleed bin Talal of Saudi Arabia. (As is widely known, the Bin Laden family, which runs a huge construction company in Saudi Arabia, was a big investor in Carlyle, giving other money it needed to do its deals. Yes, that's the same family that Osama is estranged from.) At any rate, Norris was forced out of Carlyle in 1995, Carlyle grew enormously while he was outside of it, and he is apparently trying to do a repeat performance, starting with SCO.

SCO's shareholders and creditors are obviously thrilled with this strange offer. SCO was trading on the pink sheets market for 32.5 cents a share last week (Wedneday) when this story was written, giving it a market capitalization of $6.8 million as we go to press. The stock was trading at around 5 cents a share before the SNCP deal was announced, and has ramped up quickly this week as the news spread about the $100 million buyout offer got around the investment community.

"Not only will this deal position us to emerge from Chapter 11, but it also marks an existing future for our business," said Jeff Hunsaker, president and chief operating officer at SCO. (Technically, he is in charge of something called SCO Operations, which is somehow distinct inside SCO Group, because nothing at SCO can be simple.) "This significant financial backing is positive news for SCO's customers, partners, and resellers who continue to request upgrades and replay upon SCO's Unix services to drive their business forward."

SCO says that it hopes to emerge from bankruptcy protection this year and that its board of directors, including chairman Ralph Yarro, have approved the sale. Yarro, a former graphic artist, used to run Novell top executive Ray Noorda's Canopy Group investment fund, which was created with $1 billion that Noorda had in Novell stock after he was ousted in the 1990s. Yarro had a complex lawsuit with the Canopy Group, which was settled in 2005 and which resulted in him getting Canopy's stake in SCO, making him SCO's largest investor.

I can't wait to see what happens next. As I have said before, I think making OpenServer and UnixWare open source, settling the lawsuits, and moving on is the best option. Maybe Louis Gerstner can reach out to Stephen Norris and work out a deal?

SNCP said--and continues to say--on its Web site that former presidential candidate and retired general Wesley Clark is on the company's investment committee, which was stated in the original version of this story that ran on February 21 in The Unix Guardian. Clark has contacted IT Jungle and says that he is not affiliated with SNCP and the equity firm is using his name without permission. [Corrected 02/22/08]

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