The SCO Group has struck a share repurchase deal with main investor Baystar in a desperate bid to stay alive to continue its legal battles with IBM, Novell, DaimlerChrysler and others.

SCO announced it will buy back all of BayStar's 40,000 preferred shares in the company for $13 million in cash, and will issue 2.1 million shares of common stock to cover the difference - $27 million.

Baystar in response will drop its attempt to get back its $40 million in one shot and has agreed to restrictions on how fast it can sell off those shares. The deal comes after Baystar asked for its money back after accusing SCO of not being honest with it over its anti-Linux crusade, and after Baystar bought two-thirds of the Royal Bank of Canada's share after the bank also jumped ship. The deal leaves SCO with around $45 million to continue its legal fights over the Linux operating system.

Despite the fact that the two main investors in SCO - which has staked its future on winning its legal battles - have pulled out of the deal, SCO attempted to give the story a positive spin, saying that the transaction will give it "more reedom to make business decisions".

As part of the deal with BayStar, SCO has also agreed to focus on protecting its intellectual property and de-emphasize its Unix business, according to a source close to the transaction. Additionally, SCO has agreed to keep a lower profile in the media.

TBayStar acquired 20,000 preferred SCO shares when it invested $20 million in company last year. BayStar in April said it was looking for a way out of its investment in SCO, but a month later doubled its holdings in the company by buying another 20,000 preferred shares from the Royal Bank of Canada (RBC) for an undisclosed sum.

Under the buyback agreement, BayStar can sell the common stock but its daily selling may not exceed 10 percent of the average trading volume of SCO shares on the Nasdaq over the preceding five trading days.

The conversion of BayStar's preferred stock into common stock is good news for SCO shareholders, according to Dion Cornett, an analyst with Decatur Jones. "The company relieves itself of a major disgruntled investor," Cornett wrote. Although BayStar now has the opportunity to sell its SCO holdings, the investor may hold on to the shares, Cornett wrote. "While we do not know how quickly BayStar may attempt to liquidate its newly held common shares, we believe that the investment company may be inclined to hold - awaiting a potential legal victory - based on recent public comments by BayStar's management."

SCO's Stowell also said he does not expect BayStar to start selling off SCO stock. "We believe that they probably plan to hold those shares for the foreseeable future and remain long-term shareholders," he said.

SCO claims that Linux contains code that violates its intellectual property rights and has become involved in lawsuits with IBM, Novell, Red Hat and Linux users. Linux advocates say SCO has yet to prove any of its IP claims and accuse the company of being part of a Microsoft-backed attack on the open-source operating system. BayStar has said it was introduced to SCO by Microsoft. The investment by BayStar and RBC was crucial in allowing SCO to pursue its intellectual property battle.