Small World Dept.-- SCO and MS

Friday, August 29 2003 @ 04:00 PM EDT

Contributed by: PJ

Small World Dept.-- SCO and MS
Have a Mutual Friend


There's more than one way to fund a company, it seems. An alert reader noticed that Integral Capital Management companies just filed a 13G with the SEC regarding its shares in SCO. Here's their SEC filing. Here's the SEC Search page for Integral. Here's a list of institutional owners of SCO, and you can see that as of June, Integral was already number one on the list with 4.0%. Now it's presumably 5% or more, hence the 13G.

Who are these people? I thought I'd just check and see who thinks SCO is worth buying right along about now. I was particularly interested because last Friday I noticed a surge in buying, and all week there was a spike of institutional sell messages, and then this Friday, it suddenly stopped. No sell or buy messages, as you can see on this chart. If you switch the chart to the entire month, you can easily see that after this huge and atypical increase, suddenly nothing. So I went digging.

At first, there didn't seem much to find. Yahoo lists Integral as one of the "Top Institutional Holders" of Drugstore.com, the top holder, as a matter of fact. And you can read the stock purchase agreement the parties signed on Findlaw. Here's how they describe themselves in the SEC filing:

"This statement is being filed by Integral Capital Management V, LLC, a Delaware limited liability company ('ICM5'), ICP Management V, LLC, a Delaware limited liability company ('ICP Management 5') and Integral Capital Management VI, LLC, a Delaware limited liability company ('ICM6'). The principal business address of ICM5, ICP Management 5 and ICM6 is 3000 Sand Hill Road, Building 3, Suite 240, Menlo Park, California 94025.

"ICM5 is the general partner of Integral Capital Partners V, L.P., a Delaware limited partnership ('ICP5'). ICP Management 5 is the general partner of Integral Capital Partners V Side Fund, L.P. ("Side Fund") and the Manager of Integral Capital Partners V SLP Side Fund, LLC ('SLP Side Fund'). ICM6 is the general partner of Integral Capital Partners VI, L.P., a Delaware limited partnership ('ICP6'). With respect to ICM5, ICP Management 5 and ICM6, this statement relates only to ICM5's, ICP Management 5's and ICM6's indirect, beneficial ownership of shares of Common Stock of the Issuer (the 'Shares'). The Shares have been purchased by ICP5, Side Fund, SLP Side Fund and ICP6, and none of ICM5, ICP Management 5 or ICM6 directly or otherwise hold any Shares. Management of the business affairs of ICM5, ICP Management 5 and ICM6, including decisions respecting disposition and/or voting of the Shares, resides in a majority of the managers of ICM5, ICP Management 5 and ICM6, respectively, such that no single manager of ICM5, ICP Management 5, or ICM6 has voting and/or dispositive power of the Shares."


Intricate, no? Why, I asked myself, would they be buying now? Google didn't have much to show.

Just when I thought I'd hit a dead end, I started to read Drugstore.com's 10Q, their most recent one, just filed this month. Because this is another company Integral has invested in heavily, maybe I'd find something there, I thought.

And lo and behold, guess who was just elected a director of Drugstore.com? Melinda French Gates. Yes, that Mrs. Gates. Well, that got my attention. I switched to some other search engines and really started digging, and I went to the SEC to see what I could find.

As of last December, Integral Capital Management V didn't own any SCO stock, according to this SEC filing. They did own Microsoft stock back in November. But they didn't the previous May of 2002. So the chain of investment timeline appears to go like this: First, they invested in Drugstore.com, then Microsoft, and then in SCO.

Small world, isn't it? But why? A venture capital firm is investing in Microsoft? Doesn't it seem like it should be the other way around?

Here's a description of Integral on VC Directory:

"20 portfolio companies brought to successful IPO 1997 - 99. This venture capitalist was incubated within Kleiner Perkins Caufield & Byers in 1991. Integral's partnerships are five years in duration. Integral IV began in March of 1998 with over $300 million of capital and the company currently has over $1.2 billion in capital. In 1999, Integral Capital Partners co-founded and now operates as a managing principal of Silver Lake Partners, a $2.2 billion buyout fund focused on technology and related growth businesses.

"Focus: Integral invests in technology businesses at all stages of company development beyond the start-up phase. . . .

"Integral typically invests between 20% and 50% of the original capital of each fund in private companies and buyout opportunities. Integral is an active investor, both in the venture and public stages. Their greatest contribution typically relates to corporate strategy, business development opportunities, and maximizing market value (either through an IPO or merger). Integral does not take board seats. Integral Capital Partners 2750 Sand Hill Rd., Menlo Park, CA 94025 . . ."


Here's their home page.

Think this is just a coincidence? Could be, but take a look at this article from June 6, 2003, entitled "Best friends -- VC buddies do many of their deals with pals", which explains that in a tough economic market, VC capitalist firms like Integral do business primarily with their friends, as its Roger McNamee explains:

"'People's time is limited,' said McNamee. Quoting a favorite saying in the VC biz, he added: 'When you have a choice, always do business with your friends. When you don't have a choice, your friends are the only ones who will do business with you.'"

There goes the coincidence theory. Well, they appear to know each other, according to this Fast Company article linked to on Integral's web site:

"As early as 1997, he says, 'I realized that we had escaped the earth's gravitational pull -- that we were in the midst of a true mania. The next question was, What do you do after you crash and burn? You need a strategy for investing in a long-term bear market.' So, along with a set of superstar partners, McNamee assembled the first large-scale private-equity fund focused on tech. Silver Lake Partners, which launched in May 1999, raised $2.3 billion in a matter of months, attracting a who's who of Silicon Valley and Wall Street, including Bill Gates, Michael Dell, Larry Ellison, major investment banks, and big institutions such as CalPERS and the World Bank. In the four years since its launch, Silver Lake has invested approximately $1.6 billion of the fund in nine megatransactions -- which included involvement in a landmark $20 billion leveraged buyout of legendary disk-drive maker Seagate in late 2000 and that company's IPO two years later."

So there you have it, folks. And what's the plan? Here's their investment strategy page:

"The Internet drives all three of Integral's major information technology investment themes. Cheaper computing power, more bandwidth at lower prices, and server-centric software are leading to a world of information-rich Internet services that empower decision-makers with accurate, real-time information. By utilizing the exponential forces of Moore's law and Metcalfe's law, the Internet encourages rapid development of low-cost business relationships. The Internet also liberates emerging competitors by allowing them to undermine traditional information control, price discrimination, customer relationships, and distribution channels. The Internet is delivering both buyers and suppliers better information and lower cost transactions."

This seems to dovetail with SCO's new web services model, and it also ties in with my long-held belief that the plan was to dump the GPL off a cliff, write a new kernel for UNIX, which will also do Windows, and then steal all the open source software applications they can find and let you run them as binaries on top of their kernel. In a word, yuck. Brand X Linux, for which you will pay a pretty penny, my friend. It seems there is a plan, and it looks to me now like Microsoft may really be part of it.

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