Oops - Microsoft Supports SCO with USD 100 Million

Original document is here.

Halloween X: Follow The Money

3 Mar 2004

Excuse me, did we say in Halloween IX that Microsoft's
under-the-table payoff to SCO for attacking Linux was just eleven million dollars? Turns out we were
off by an order of magnitude — it was much, much more than
that.

The document below was emailed to me by an anonymous whistleblower
inside SCO. He tells me the typos and syntax bobbles were in the
original. I could not, when I received it, certify its authenticity,
but I presumed that IBM's, Red Hat's, Novell's, AutoZone's, and Daimler-Chryler's lawyers could subpoena the original. On March 4th SCO, within 24 hours of publication, I received word from Steven J. Vaughan at eWEEK.com that SCO had
confirmed that the memo is legitimate.

Explanatory comments are interspersed in brown serif font
(I changed this from green because of complaints from the colorblind).
Particularly noteworthy bits of the original are in red.

--- From the mailbox of chris sontag

From: Mike Anderer
Sent: Sunday, October 12, 2003
To: csontag@sco.com
CC: Bob Bench
Subject: Conversation Friday

Chris
Sontag, the recipient of this mail, is Vice-President and general
manager of the SCOsource, responsible for (as his company page puts
it) overseeing the development and licensing of SCO's immense
intellectual property holdings..

Chris:

I know you were going totalk to Bob later Friday, but I figured I would
outline the issues.

Bob Bench
is is the Chief Financial Officer of the SCO group. He is in the Cc
line.

Mike Anderer is a consultant with
an outfit called S2 that bills itself as a Strategic Consulting firm, in their M&A group. His name is in SCO's SEC filings.

S2 held warrants on SCO stock in July 2003. They were thus in a
position to profit if they had reason to anticipate a spike in this othwerwise
unpromising stock (SCO/Caldera had never been profitable).

Anderer also appears to be the CEO of a company called
Entirenet.
If their site is any indication, Anderer and his company are about as tight
with Microsoft as it's possible to be without French-kissing Bill Gates.

Tim Rushing has put together a
timeline of
events involving Anderer and the SCO/Microsoft connection.

1) Baystar is easy as they were just a Microsoft referral and would be 2%

Baystar Capital is a venture-capital firm.
In 2003 SCO got about fifty million dollars from them in a deal
that was rumored to have Microsoft's hand behind it. This confirms
the rumor.

That is particularly interesting in view of the
agreement that
gives holders of 33.4% of the Baystar Series A stock the right to
approve or or veto actions leading to contingency payments
to Boies and the other two law firms. One suspects that digging into the identities of Series A shareholders — and their ties to Microsoft — might yield interesting results.

2) Any licensing deal would be at 5%

3) Much of the other work would go from 2% to 3% as I have engaged in
direct, but this would require according to Bob either Darl or you
signing off on the fact that this ane was not a referral.

Mike Anderer is discussing his fee for brokering the deal.

4)  On the patent side for IPX, where foes that fit it.  I am working
with the lawyers to get these moved from provisional to more complete in
the next week.  I think it will spawn at least 3 patents.  Ed and I are
the inventors on these.  What do we fo here

My original commentary observed that IPX is
a network stack developed by Novell. The implication was that Mike
Anderer thinks SCO might be able to get a patent lock on it, so they
were looking for IP leverage against Novell. This is probably wrong;
he was more likely referring to this
IPX, a company that exists to help set up patent litigation.

Provisional patent applications "die" in one year from
filing date, so whatever applications he;s talking about were filed no
earlier than Oct 2002
and converted to real applications no earlier than Oct 2003 (because
they aren't done as of the date on the memo). Average pendency for
software patents is 2-3 years. The patents thus will most likely not be
issued until 2006 (if ever). The applications are generally published 18
months after filing, though. (They must be published unless they intend
to file them only in the USA.) So, one might expect to see the
applications published in Apr/May 2005.

If the patents in question ever go live, they should be findable with this search once they go live. Right now this search reveals three patents with Anderer's name, and that "Ed" is probably Ed Iacobucci.

5) The RedHat, Acrylis examiniation, there is no upside here is this
billable seperatly.  I bought a PC and loaded up RedHat and will take
that over and work through it with the Lawfirm.  What do we do here?

Acrylis is a company that Caldera (which became
SCO) partnered
with in 2001; they were later acquired by Caldera. On page 53 of
SCO's 2002 10-K it says:

On May 3, 2001, the Company acquired the WhatIfLinux technology from
Acrylis, Inc. WhatIfLinux technology provides Open Source users and
system administrators with Internet-delivered tools and services for
faster, more reliable software management. In consideration for the
assets acquired from Acrylis, the Company issued 1.25 million shares
of common stock with a market price of $1.95 per share, or
approximately $2.4 million, paid $1.0 million in cash and incurred
approximately $0.1 million in direct expenses. The Company has
accounted for the acquisition of the WhatIfLinux technology using the
purchase method of accounting. The allocation of the consideration
paid for the WhatIfLinux technology consisted of assigning
approximately $3.0 million to purchased technology and $0.5 million to
goodwill. The acquired technology is being amortized over a three-year
life.

In context, the word "examination" seems likely to refer to examination of a patent claim. One of the inventors on this patent, a man formerly employed at Acrylis and SCO, thinks it might be the one in question. It'a core patent of WhatIf, and certainly reads like it could be used to attack Red Hat Network.

The ongoing lawsuit between Red Hat and SCO is
documented here.

I realize the last negotiations are not as much fun, but Microsoft will
have brough in $86 million for us including Baystar.  The next deal we
should be able to get from $16-20, but it will be brutial as it is for
go to makerket work and some licences.  I know we can do this , if
everyone stays on board and still wants to do a deal.  I just want to
get this deal and move away from corp dev and out into the marketing
andfield dollars....In this market we can get $3-5 million in
incremental deals and not have to go through the gauntlet which will get
tougher next week with the SR VP's.

This is the smoking gun. We now know that
Microsoft raised $86 million for SCO, but according to the
SCO conference call this morning (03 Mar 2004) their cash reserves
were $68.5 million. If not for Microsoft, SCO would be at least $15
million in debt today.

The "$16 to $20" is probably $16 to $20 million in cash, and since
this memo is five months old that deal is almost certainly completed
by now. This means it's possible SCO has burned
through as much as $30 million in just a year of barratry.

But there is a more interesting (if farfetched)
possibility. Just a couple of days after October 12 SCO's stock price
rose sharply from $16 to $20. I don't think the context of the memo
supports this reading...but was Microsoft so confident of its ability
to manipulate SCO's stock price that it offered to do that as a payoff?

Some people think I'm double-counting that second deal,
or that it never went through at all. I'll admit the language is ambiguous,
but the low-ball interpretation of the numbers is $66M (Anderer's $86M minus
his high $20M figure for the value of the second deal). That's still a hell of lot of money, essentially the entirety of SCO's cash position in its 1Q2004
10Q. So the only difference here is that SCO would merely be flat broke
without Microsoft, rather than $15M in the hole.

The part that starts I just want is
interesting, too. It looks as though Anderer is talking about
shopping for a wealthier patron group within Microsoft's corporate
hierarchy; SCO has been taking money from Microsoft corp dev
(probably corporate development) but the gauntlet of
Microsoft's senior vice-presidents is about to make that more
difficult. He thinks they can get more money from marketing and
field dollars. Later paragraphs suggest that he's talking about
talking co-marketing money out of different groups within Microsoft,
probably their Corporate Marketing and Field Marketing groups.

We should line up some small acquisitions here to jump start this if we
do it.  We shoudl also do this ASAP.  Microsoft also indicated there was
a lot more money out there and they would clearly rather use Baystar
"like" entities to help us get signifigantly more money if we want to
grow further or do acquisitions

In other words, Microsoft wanted to funnel its
anti-Linux payoff through third parties. Maybe in case the antitrust
guys at the Department of Justice happen not to be asleep at the
switch?

The bit about acquisitions seems more ominous when
you remember that Caldera/SCO has a long history of lawsuits over
obsolete technologies stripped out of dead companies — starting
with DR-DOS from Digital Research and continuing through USL's System
V into the present with the IBM lawsuit.

This Microsoft deal is the Ante to the poker game...We should get this
done and go after several $2-3 Million deals from the expense side of
their company.

So their revenue plan for the future is to hit Microsoft up for money, then hit them up for more money.

The will help us a lot and if we execute we could exit and Unix
componients we have build potentially back to Microsoft or MCS.

MCS probably equals Microsoft Consulting Services here.

I think they are on track and may not be able to push much more this
round, but there are other ways to get money from them, their partners,
investment bank referrals, etc..

Do kepp in mind that they have brough us between $82 million and $86
million if this deal is between $4million per quarter where Rich is at,
or it turns into %5 million wjich is the lowest number Chris had
interest in.

Rich, in context, must be whoever at Microsoft Corporate
Development was responsible for haggling with Chris (Sontag) over the magnitude of SCO's payoffs. He is probably Rich Emerson, Microsoft's Senior Vice President of Corporate Development and Strategy. The third-person reference to Chris might seem odd considering that the memo is addressed to him, but people sometimes do that in email when it has more than one recipient.

The "Ante to the poker game" is the $16-$20 million deal
that was current at the time the memo was written. Somewhere between $66
and $86 million had already been delivered. Together, they're
counting on between $66,000,000 and $106,000,000 from Microsoft's
corporate development division alone...

This paragraph, closely read, strongly suggests that
"$16 to $20" is in fact a cash spread, not a stock price spread, and is
denominated in millions. $4M times 4 quarters is $16M, $5M times 4 quarters
is $20M.

There will be more, lons, partnerships, etc..but we need to just get
this one done.  It is too high profile, it is also critical, but they
are not the people to pitch.  We should get what we can from them ad
then work the other and larger areas of the company and groups where
they have real budget and need for our help.

...and that $66 to $106 million is before they hit up the
rest of Microsoft.

Let me know your thoughts.

-Mike

There you have it. At least a third of SCO's entire market
capitalization, and their entire current cash reserves, is payoffs
funnelled from Microsoft. Their 10Qs reveal that
every other line of cash inflow is statistical noise by comparison.
The brave new SCOsource business model is now clear: sue your
customers, shill for Microsoft, kite your stock, and pray you stay
out of jail.

Five days after this memo was written, SCO's PR chief Blake Stowell
responded to widespread speculation that Microsoft was behind the
Bystar deal by vehemently denying it.

This continues to be SCO's party line. Their
response
acknowledges that the memo is authentic but claims that Anderer —
the consultant they hired to find, handle, and brief the Board Of Directors
about this kind of Transaction (see the
Statement of Work in his
contract with SCO), was mistaken about the deal. They
would have us believe that Anderer wrote this memo to Chris Sontag expecting
to collect a commission for bringing in Microsoft on a deal that, according
to SCO, didn't involve Microsoft at all.

SCO's response is of the form "the memo is genuine, but..." It's
a valiant attempt to put something after the "but" that might possibly
make some sort of difference, but...they are rearranging deck chairs on the
Titanic when they quibble about the specifics. OK, Perhaps Blake Stowell
isn't lying through his teeth, but was kept out of the loop so he could
honestly deny all knowledge of Microsoft's involvement. If so, we wonder what
else SCO's director of PR doesn't know...

And, of course, the next question to ask, the one that might pierce all
of SCO's and Microsoft's denials, is a very simple one: did Mike Anderer
get paid his commision on this "misunderstood" transaction?

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