SCO Backer BayStar Cuts Back Its StakeSCO Backer BayStar Cuts Back Its Stake

BayStar Capital II LP has sold 40,000 shares of series A-1 convertible preferred stock of SCO Group Inc. back to the company for $13 million in cash and more than 2.1 million shares of SCO common stock. The deal was a compromise for BayStar, which, along with the Royal Bank of Canada, last October made a $50 million investment in SCO to help the company pursue its intellectual property lawsuits against IBM, retailer AutoZone, and other Linux vendors.

Particularly displeased with SCO's handling of the IBM lawsuit, BayStar in April demanded that SCO either change management or refund its original $20 million investment. Soon after that demand, BayStar assumed $20 million of Royal Bank of Canada's investment.

The agreement restricts BayStar from unloading the common stock all at once in the event SCO's stock value increases rapidly.

Ultimately, BayStar decided to settle rather than sue. "BayStar feels the transaction is positive for all parties," a company spokesman says. SCO couldn't be reached for comment Wednesday, but the company has postponed the announcement of its second-quarter financials in order to address this latest transaction.

BayStar's uneasiness with SCO surfaced publicly in April when BayStar expressed a number of concerns. The investment firm first wanted SCO to add to its management team people skilled in the areas of intellectual-property management, litigation, and the overall running of a public company.

A second concern for BayStar had been SCO's unwillingness to focus on its greatest area of shareholder value: its year-old, multibillion-dollar lawsuit against IBM. BayStar was also concerned about SCO's undisciplined approach to communications with the media and the public.

BayStar's original $20 million stake proved controversial when some accused Microsoft of trying to help SCO's anti-Linux battle through the venture-capital firm.