Dion Cornett upgrades SCOX

Message ID: 168402
Posted By: al_petrofsky
Posted On: 2004-08-17 23:15:00
Subject: Dion Cornett upgrades SCOX

Yesterday, Dion Cornett upgraded his rating of SCOX from
Underperform to Market Perform, increased his price target
from $2 to $3, and recommended covering short positions.
Here's the short version in his free weekly newsletter Open
Source Wall Street:

opensourcewall*street.com/phpBB2

(You must remove the *, which I added because Yahoo's URL
eater is especially ravenous for wallstreet.)

> SCOX Upgraded to Market Perform

> We believe that investors should cover short positions in
> the SCO Group (SCOX: Market Perform). Our prior investment
> thesis was that deteriorating financials would pressure
> the stock well ahead of any legal windfall. We now believe
> that a series of legal setbacks makes it more likely that
> SCOX settles for a reduced sum well below the requested $5
> billion from IBM (IBM: not rated). We believe that any
> settlement or buy-out, potentially by a third party such
> as Hewlett-Packard (HPQ: not rated), would most likely: 1)
> result in the opening of legacy UNIX code, removing
> concerns associated with Linux; 2) provide a face-saving
> exit for SCOX management; 3) preserve an estimated $48
> million in cash that might otherwise be spent on
> attorneys; and 4) potentially provide a small return to
> shareholders from current prices, creating additional risk
> in our prior investment thesis. While our target price
> remains below SCOX's current price, related still to
> SCOX's continued cash burn for legal expenses, we note
> that SCOX management could mitigate that burn at any time
> by settling. Please see our detailed Aug 16th report.

I have a copy he sent me of the detailed report. Here's the
price target change:

> While our revenue expectations remain unchanged, we have
> modestly increased our earnings estimates for this year
> and next, based on additional cost reductions.
> Consequently, our one-year target moves from $2 to $3.
> The primary risks to our target price are changing legal
> expenses resulting in faster or slower cash burn or an
> unexpected legal victory or defeat. We would opine that
> now more upside exits [sic.] than downside in the
> courtroom, given as we discussed earlier that the market
> apparently is assigning approximately zero value to the
> likelihood of a win over IBM. Thus even if IBM wins its
> motions for declaratory judgment on copyrights in
> September, or its new request for Partial Summary Judgment
> on Contract Claims, the negative impact on SCO's share
> price will likely be mitigated by the company's cash
> balance. Ironically such a loss could be the event that
> forces SCO to settle, or outright give up, preserving the
> cash balance that constitutes over 60% of its market
> capitalization.

I'm not sure why he seems to be so clueless about the claims
*against* SCO. I'll show you my email to him in a follow-up
post.

Message ID: 168403
Posted By: al_petrofsky
Posted On: 2004-08-17 23:17:00
Subject: Email to Cornett

[see parent Yahoo post for context]

Date: Tue, 17 Aug 2004 14:30:37 -0700
From: Al Petrofsky
To: Dion Cornett
Subject: Re: scofacts.org and SCOX rating

> Attached is our report.

Thanks.

> Take a look and tell me what you think.

I think you're out of your mind. (No offense intended, of
course.)

You seem to have completely overlooked SCO's liability to
Red Hat. You state "Red Hat's declaratory judgment suit
... would generally survive any transfer of assets".

If Red Hat successfully obtains the declaratory judgments it
seeks, that would not directly cost SCO or its successors
anything, but you shouldn't characterize Red Hat's
seven-count complaint as a "declaratory judgment suit" just
because the first two counts are for declaratory judgments,
listed first because they are the most urgent. (Note that
SCO's suit against IBM survives despite SCO's first count
having been the apparently completely baseless
Misappropriation of Trade Secrets claim, which SCO withdrew
after 11 months when it couldn't even comply with the
court's order that it simply list, under court seal, what
secrets it was talking about.)

Red Hat and IBM have not attached showy 10-digit monetary
figures to their Unfair Competition claims as SCO has, but
their damages are real and significant and will be
quantified in due course. It seems quite likely that SCO
will have to pay punitive awards in addition to covering all
of the actual court and marketplace damages to Red Hat and
IBM.

You say:

> ... such a loss could be the event that forces SCO to
> settle, or outright give up, preserving the cash balance
> that constitutes over 60% of its market capitalization.

Why do you believe that SCO outright giving up would
preserve the cash balance? Given the Boies team's legal
performance to date, and the fact that this is the only team
defending SCO, why do you seem to be assigning approximately
zero value to the likelihood of Red Hat and IBM wins over
SCO?

Regarding your income statement:

[less-interesting technical correction elided to satisfy
Yahoo length constraints]

-al

Message ID: 174407
Posted By: al_petrofsky
Posted On: 2004-08-31 05:21:00
Subject: Unbiased experts on SCO's claims

Dion Cornett asked me in an email yesterday:

> One thing I was looking for was a list of seemingly
> unbiased legal experts who in the course of interviews or
> otherwise have expressed doubt wrt SCOX's claim. Would
> you happen to have some names ahead of tomorrow's
> conference call?

I don't have the patience right now to squeeze my response
into yahoo posts, but you can see it at

scofacts.org/cornett-2004-08-31.txt

It begins:

Generally, for a legal expert to look at a case closely
enough to be able to give an informed opinion about it,
someone must pay him considerably for his time, and the
source of the funds will often seem to introduce a bias.

However, since the last conference call, two legal experts
who are seemingly unbiased (at least we all hope so) have
scrutinized SCO's claims and expressed considerable doubts
about them. Their names are Dale Kimball and Rae Lee
Chabot.

...

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