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Caldera Buys SCO Unix & Professional Services


It’s the beginning of a new era and the end of an old one. Last night, Caldera, a leading Linux distributor, bought the Server (Unix) and Professional Services Division of Santa Cruz Operations (SCO), the long-standing leader of Intel Unix. With this single move, Linux and Unix are unified for the first time under one company. The enterprise operating system world will never be the same.As reported earlier by Smart Partner , the two companies have been close to a deal for weeks. In the end, Caldera gained not only the Unix-on-Intel Server Software Division–which consists of UnixWare and OpenServer along with SCO’s existing reseller partnerships and contracts in SCO’s traditional global markets of small and midsize businesses, retail, telecommunications and government–but also the Professional Services division, as well.

This Professional Services division provides consulting, support and installation/integration support to both direct customers and SCO’s partners. This division, under Jim Wilt, current president of the SCO Professional Services division, will operate as a separate business unit of Caldera.

As for joining together time-tested Unix and low-cost, open-source Linux, Caldera states that it offer the industry’s first comprehensive Open Internet Platform (OIP) combining Linux and UNIX server solutions and services globally. Specifically, that will include Caldera’s Linux line and SCO’s OpenServer and UnixWare lines. The combined OIP product line will be unveiled at SCO’s premier partner show, Forum2000, on Aug. 23 and made available through SCO and Caldera’s existing 15,000 worldwide partners.

The Fine Print

Caldera Systems is forming a new holding company, Caldera Inc., to acquire the two divisions. This deal includes those division’s employees, products and channel resources.

In the deal, SCO will receive 28 percent of Caldera Inc. This is estimated to be an aggregate of approximately 17.54 million shares of Caldera stock (including approximately 2 million SCO options shares reserved for SCO employees joining Caldera), and $7 million in cash. Simultaneously, Ray Noorda’s venture capital firm, The Canopy Group, Caldera Systems’ major stockholder, has agreed to loan $18 million to SCO. Presuming that Caldera, Inc.’s stock is valued at $5.00 a share–the average price of Caldera Systems and SCO stock before the market opens on Aug. 2–the deal is worth approximately $84 million in stock for a total, not counting the loan, of $91 million.

SCO also will retain its highly valued Tarantella, a popular application service provider (ASP) division, and the SCO OpenServer revenue stream and intellectual properties. In the last quarter, SCO OpenServer revenue amounted to $11.1 million. After expenses, the net proceeds to SCO will be approximately 55 percent of future SCO OpenServer revenues. The investment banks of Chase H&Q for SCO and Broadview for Caldera Systems helped arrange the deal.

Both firms’ boards of directors have unanimously approved the acquisition. The final decision is subject to the approval of Caldera Systems and SCO’s stockholders. If all goes well, the deal should close in October 2000.

Caldera Inc. will be headquartered in Orem, Utah. Following the acquisition, Ransom Love, current president and CEO of Caldera Systems, will become CEO of Caldera Inc.; and David McCrabb, current president of the SCO Server Software Division, will become president and COO of Caldera Inc. Finally, Doug Michels, president and CEO of SCO will become a member of Caldera Inc.’s board of directors.

A View From The Top

Leadership at both companies is happy about the deal. Love described the deal as an “industry-changing event that puts Caldera front and center as the answer to the enterprise question.” For those who might worry about what this means for their existing SCO operating systems, he states that “Caldera is fully committed to supporting and servicing the SCO OpenServer and UnixWare communities.”

David McCrabb elaborates on Love’s statements saying that “Caldera Inc. will incorporate a worldwide network of sales and support offices, a strong commercial Unix system business and a rapidly growing open-source company. This combination will be a force to contend with in the worldwide market for Internet solutions on high volume platforms.”

As for what remains of SCO, Tarantella, Michels believes that, “this transaction enables us to invest in the exciting growth opportunities … by the continued attractiveness of thin-client computing and by the accelerating adoption of the ASP” model.

The Reaction

Some are welcoming the change with open arms. Many believe that uniting Unix with Linux can only strengthen Linux’s rising tide. According to IDC, Linux has 1.4 million server licenses, far more than all Unixes put together, but SCO’s servers are located in the core of many older businesses. While Linux’s strength is on the Internet, SCO still runs many small to midsize businesses, governmental departments and vertical markets.

From a Caldera supporter’s viewpoint, Caldera gets a strong foothold in traditional brick-and-mortar businesses while maintaining the place in the Linux e-commerce and Internet strongholds. In addition, Caldera gets access to an outstanding, albeit somewhat ragged after the difficult ties of the last year, reseller channel.

Some people, including one senior executive at a disenchanted SCO reseller, however, don’t think Caldera will be getting much of a deal. He says that, “Anyone who has attended the last few SCO Forums can tell you that the SCO channel has just about disappeared. The combination of competition from NT, the attempt to force Open Server customers to convert to UnixWare and direct selling by SCO has just about killed off every VAR and integrator.”

Others–such as David Gloria, SCO Premier Reseller with Computer Integrators and president of Ixorg, an organization of SCO resellers–are more optimistic. Gloria believes “that the real value that Caldera will get from the deal is not the UNIX name, not the customer base, not even the technologies. It is the Reseller Channel.”

At this early stage, Caldera certainly shows every sign of supporting the channel. Caldera Systems will join SCO in hosting Forum2000, SCO’s premier partnership event starting on Aug. 20 at the University of California, Santa Cruz. The company also plans to unveil its updated product offering at the show.

Chris Clabaugh, Allegix’s CEO, agrees that the signs look good, “I view the [proposed] SCO/Caldera mix to be a good thing for customers like us.” He believes that because the “consolidation of operating-system platforms choices will mean simpler product choices for both customers and channel partners.” Still, he thinks that the deal also needs to result in “the combination of SVR 3/4/5 enterprise features with Linux” to be a real success.

Red Hat CEO Matthew Szulik would agree with that, although in a harsher manner. “This validates what we and the IDC numbers have been saying all along about the death of the proprietary Unix market. As advocates of open source, we look forward to Caldera’s support of open sourcing SCO’s proprietary Unix technology to the entire open-source community.”

Still, Caldera’s path isn’t one that Red Hat would choose. Szulik goes on to say that, “Red Hat has made nine acquisitions in nine months–nine acquisitions that emphasize our focus on new and emerging markets. We believe that our focus on these markets, rather than the rehabilitation of old markets, is what will help Red Hat continue its role as a leading innovator in the open-source technology industry.”

The lines are drawn. Only time, and the marketplace, will tell whether the marriage of Unix and Linux will be a happy one.

Why SCO Made The Deal

Frankly, SCO had little choice but to make some kind of deal. While according to IDC’s research manager for system software Al Gillen SCO is the leading Unix distributor holding 37 percent of the Unix market with 313,000 software license shipments in 1999, compared to Sun’s 22 percent of the market, SCO and the Server division were still losing money hand over fist.

While the Server division, according to Doug Michels in his third quarter report to stockholders, accounted for 92 percent of the company’s total revenue, SCO was in deep trouble. In its just reported third quarter 2000, revenues had dropped to an alarming $26,931,000, from $57,060,000 for the same quarter last year. Even more painful, the net loss for the quarter was $19,240,000, or $0.54 per share, compared with a net profit of $4,535,000, or $0.13 per share.

The picture didn’t get any brighter from a broader perspective. The overall revenues for the nine-month period ending June 30, 2000, were $116,126,000, compared with $165,504,000 for the same period in fiscal 1999. The net loss for this period was $36,174,000, or $1.02 per share, basic and diluted, compared with a profit of $11,483,000, or $0.33 per share, basic and $0.32 per share. Anyone could foresee what would happen next: By July 31, SCO stock reached a near all-time low of 3 and an eighth.

SCO’s financials really had only one silver lining: Tarantella. While the Professional Services division showed a slight dip, Michels commented that “We were particularly pleased to see that the Tarantella division was able to increase revenues by 59 percent from the prior quarter.”

Outside observers thought SCO’s financial troubles were due to several factors. Michael Foster, VP of marketing for ASP infrastructure provider and SCO customer Allegrix Inc., and former SCO director of communications, comments that, “It could be that SCO’s caught in a perfect storm of their own. … The Linux front, combined with the Windows2000 front, combined with the Internet e-business front [IBM, Solaris, etc] all of which has SCO bobbing up and down.”

Dan Kusnetzky, VP for system software research for IDC, thinks that part of the problem was that, “Unix is a mature market. SCO is trying to transform their business and it was in their other two divisions, Professional Services and Tarantella, that they still have a good chance at growth.”

Another problem with the Unix division was that, while technically SCO Unix products were excellent, Kusnetzky also comments that, “SCO was in the middle of a three-front marketing war with Linux moving into their bread-and-butter of low-end systems, Solaris moving down into IA-64 and Windows 2000.” He also noted that while SCO is the leading Unix provider that because they let the SCO brand disappear underneath customers’ names like Compaq and Oracle, so that few people actually knew they were running SCO operating systems.

Michels, on the other hand, put the blame for SCO’s fall on the impact of last year’s Y2K problem. He said that, “It had quite an impact on our business. And, were slowly, much more slowly than expected, gaining business back.” But, he also admitted that, “The Internet, Web-centric, ASP models and Linux are starting to have an impact on the industry and will continue to do so in the future.”

The future turned out to be only a few days away.

First Published in Ziff-Davis’ Sm@rt Partner

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