The promise of a $100 million infusion from a New York investment firm looks to guarantee The SCO Group has the resources to continue its high-profile legal battles against Novell, IBM and others that have rattled the open-source software community.
The small Lindon-based software developer said Thursday it has secured the investment that will allow it to reorganize itself in federal bankruptcy court and continue its legal battles. Under the deal, which first must be approved by a federal bankruptcy judge, Stephen Norris Capital Partners of New York and unnamed Middle East partners will take the company private and share in any proceeds from the lawsuits.
A filing in bankruptcy court in Delaware, where SCO Group sought protection from creditors last year, says Stephen Norris is to provide an immediate $5 million to the company if the presiding judge approves the reorganization plan. The company led by experienced financial manager Stephen Norris, who co-founded The Carlyle Group, will receive at least 51 percent ownership.
The deal "provides that the reorganized SCO will pursue the Novell/IBM litigation and other pending litigation claims aggressively," according to the court document.
Rob Enderle, principal analyst of the Enderle Group, who has been following the SCO Group lawsuits that involve SCO's claim of ownership of UNIX computer operating system, speculated that Stephen Norris Capital Partners is seeking a return of up to 200 percent on its investment, typical for a venture capital firm.
That could be accomplished if The SCO Group is able to get an earlier ruling overturned in the Novell case - as some see as likely - and then turns to IBM and seeks a settlement of the lawsuit in which it originally sought more than $1 billion, Enderle said.
"It might be doable if they can reinstate its ownership rights [of UNIX] during appeal," he said.
With its business for its UNIX software products declining because of competition from the Linux operating system, SCO Group sued IBM in 2003. While SCO says IBM put some of the UNIX code that SCO claims the copyright to directly into Linux, its larger claim is that IBM used UNIX as the basis for making significant changes to Linux that made it a viable commercial product.
The Linux code is open to the public and can be freely altered by individuals or companies for their own use or for redistribution and sale.
SCO subsequently sued Novell for interfering with its UNIX ownership rights. But a federal judge ruled against SCO last year and set trial for April on the possible fees that The SCO Group could owe Novell for use of UNIX.
Advocates of open-source software were outraged by the SCO suit against IBM because what they viewed as a commercial assault on the movement to open up software code for public use.
"There are always margins to be had from the ruins of a wrecked company," Jim Zemlin, executive director at The Linux Foundation, said in a statement. "The SCO litigation has been like a bad horror flick and about as believable."
Besides the immediate infusion of $5 million if the bankruptcy court approves, Stephen Norris also is extending a five-year credit line of $95 million, with interest of 17 percent plus the rate that banks charge each other for loans.
In return, Stephen Norris is asking the bankruptcy court to approve a protection plan in which it would have the right to participate in any settlement negotiations. The firm also would share equally in any proceeds from settlements prior to approval of the reorganization plan.
The stock of The SCO Group was delisted by Nasdaq last year and has been trading over-the-counter. It finished up 46 percent on Thursday, rising nearly 3 cents to nearly 9 cents a share, with about 811,000 shares changing hands.
SCO and Stephen Norris declined comment beyond a written statement announcing the deal. Novell also declined comment and IBM did not return a phone call.