Another Blow for SCO

SCO Group's (Nasdaq: SCOX  ) share price has been riding a sick-looking roller coaster since last week's announcement that one of the company's primary financiers, BayStar Capital, wants to pull up stakes and skip town.

SCO Group has made headlines for the past year as the computer industry's bullyboy. The group owns rights to a version of Unix, and its growth strategy involves a wave of lawsuits on a variety of related complaints against deep-pocketed firms such as IBM (NYSE: IBM  ) , DaimlerChrysler (NYSE: DCX  ) , and AutoZone (NYSE: AZO  ) .

BayStar Capital came onto the scene last October. The hedge fund sank $20 million into a convertible stock deal and arranged for another $30 million from the Royal Bank of Canada (NYSE: RY  ) , giving SCO a life-saving infusion, since the firm is burning plenty of cash while its Unix business withers. The affair stirred plenty of conspiracy theories after it was revealed that BayStar's principals had gotten the investment idea from Linux-hating Microsoft (Nasdaq: MSFT  ) .

Last week, BayStar sent a letter to SCO asking for the return of that investment. The Royal Bank of Canada is considering its own options. And yesterday, BayStar upped the pressure on SCO, saying the software firm needed to shake up its management and acquire executives with more legal experience to support its legal strategy. Bob McGrath, a spokesman for BayStar, told me that the firm believes that SCO's intellectual property (IP) assets, meaning the claims against Linux, have the strongest value, and it is BayStar's position that SCO's continued support of its other businesses won't provide substantial shareholder value.

BayStar's got SCO by the. um. nose, and the company seems to know it. The pugnacious chest-beating that often emanates from the Utah offices is noticeably absent as management tries to smooth things over with its new masters. SCO now has no choice but to win in court. But the odds look pretty bad.

Knowledgeable IP litigators have told me they think SCO has less than a 10% chance of prevailing in its cases, and even then, the courts' remedies would likely be a rewrite of the offending Linux code, not a cash windfall for SCO. BayStar Capital can afford to bet against the odds and lose. SCO cannot.

Talk open-source operating systems in the Fool's Linux Users Group discussion board.

Fool contributor Seth Jayson thinks SCO should drop its litigation, apologize profusely, and try to run a legitimate business providing Linux services. He owns no stake in any company mentioned above. View his Fool profile here.

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