SCO gets $50 Million Investment

sjbe writes "It was announced today that SCO received $50 million in private equity funding. The lead investor is BayStar Capital which has invested in Roxio among other companies. This gives SCO a pretty big war chest to fight IBM. Before this investment SCO only had a few million in cash remaining. If you thought SCO was annoying before, this won't help."

Comments

It's actually good news if you don't like SCO

[Strudelkugel]

From the PR:

The investment in SCO was structured as a private placement of non-voting Series A Convertible Preferred Shares, convertible into common equity at a fixed conversion price of $16.93 per share, which was the average closing bid price for the Company's common stock for the five previous trading days prior to the date of closing.

As someone else pointed out (but didn't get modded up since this is a site for tech geeks, not financial geeks), SCO has more than likely received what is generally known as "Death Spiral Financing." If BayStar believed in SCO, and SCO thought it had a future, the conversion price would have certainly been higher than the "average closing bid of the last trading days..."

Here's how BayStar makes money:

1. "Invest" $50M in SCO
2. Receive shares for their "investment", $50M/$16.93 = 2,953,000 SCOX
3. Last but definitely not least, go short 2,953,000 SCOX in the open market. (They don't tell you this part)

For those who aren't familar with shorting, this means borrowing stock you don't own to sell to someone else. You get the money, but you will have to give the stock back in the future, since it is borrowed. What you are anticipating is that the share price will go down, so you can buy the shares back for less than you got for them. Profit!!! The danger is the that stock will go up, which you means you will have to pay more than you originally got, causing a loss to you. So why is BayStar doing this? Easy, SCO just gave them enough shares to "cover their" short position. If the stock goes up, BayStar is covered. If it goes down, Profit!!! This is a big SHORT bet by BayStar. If SCO wasn't desperate, they could have told BayStar the conversion price is $20/share for example, something higher than the current average price when the deal was signed.

This most likely signals the beginning of the end of SCO.