While they're meant to serve justice, lawsuits can nonetheless be effective business tools; that is, in generating publicity, distracting competitors, getting cash in settlement from a competitor, and so on.
Look at SCO Group (Nasdaq: SCOX). The obscure small-cap company suddenly caught fire when it sued IBM (NYSE: IBM) last March. The lawsuit was bold, alleging violations of trade secrets and copyrights related to a hot market segment, Linux. The damages? A hefty $3 billion.
SCO has attracted the services of a top-notch litigator, Boies Schiller & Flexner (they handled the antitrust battle against Microsoft and represented Al Gore in the 2000 presidential election dispute). Yet, such legal brainpower comes at a steep price. Besides the hourly fees, SCO is contemplating paying the law firm 20% if SCO is sold, 20% of the proceeds of a settlement with IBM, and 20% of the proceeds from any equity offering.
To pay the legal tab, SCO recently completed a private placement for $50 million from BayStar Capital.
The legal wrangling intensified this week with a flurry of subpoenas. SCO served Linus Torvalds, the programmer who invented Linux; Richard Stallman, the president of the Free Software Foundation; Transmeta (Nasdaq: TMTA); and Novell (Nasdaq: NOVL). IBM served analysts at Deutsche Bank and Yankee Group, as well as BayStar Capital.
For IBM, Linux is clearly an area of great strategic importance. In fact, the company, recently invested $50 million in Novell, so as to carry out its Linux initiatives.
IBM has also has experience in high-stakes litigation. No doubt, IBM has the resources to drain SCO's treasury in escalating legal fees.
Besides, intellectual property litigation tends to be highly complex and can take years to resolve in the courtroom. Again, advantage Big Blue.
Of course, in litigation, the attorneys always win. And, SCO's newest major investor will probably win, too, since it built nice protection features into its structured investment. But common stockholders -- essentially betting on a lawsuit -- enjoy no such protection.
Is this serious for Big Blue, or is SCO Group just another fly to be swatted? Talk it over on our IBM discussion board.
Tom Taulli is a professor of finance at the USC School of Business (don't worry, he does come out of his ivory tower). You can reach him at tom@taulli.com.
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