Canopy's future uncertain, but legacy assured

Published March 27, 2005 12:01 am
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In its heyday, the Canopy Group was Utah's prime technology incubator. Using the fortune of technology legend Ray Noorda, it launched, funded and inspired the creation of thousands of new, high-paying jobs.

Now, the 10-year-old venture capital firm - scarred by tragedy and threatening to unravel even as the one-time genius of its founder suffers the ravages of Alzheimer's disease - finds itself at a corporate crossroads, its future uncertain.

"Is this a tragedy or not?" asks Greg Butterfield, chief executive of the now-independent Canopy prodigy Altiris Inc. "Ray Noorda and Canopy . . . were key to our success. In 1998, they took the risk and invested in a little company out in Lindon, Utah, when [others] would not."

Still, that was then. In the past eight years, Butterfield says, his company has grown dramatically, marking a 68 percent growth in revenue for fiscal 2004 to nearly $167 million.

Butterfield added the fledgling Utah technology sector once championed nearly alone by Canopy has also seen rapid expansion of the funding, insurance and legal infrastructure it needed to thrive. As much as Canopy would be missed, Butterfield believes there now exists "an ecosystem for any company to be successful in Utah."

"There's enough money now to support all the initiatives out there," Butterfield adds.

Altiris is one of several Canopy projects that made good. LinuxNetworx, the supercomputer maker, and MyFamily.com, the online genealogy company, are among the more recognized of other Canopy offspring now thriving.

But in the past two years, other Canopy offshoots have struggled. The SCO Group plunged into controversy with its 2003 filing of a $5 billion lawsuit against IBM over the purported misappropriation of proprietary Unix code by the freely distributed Linux operating system.

SCO's claims - extended into other litigation involving Linux distributor RedHat; Linux end users DaimlerChrysler and AutoZone; and even Novell, which disputes SCO's ownership of Unix - have made both SCO and its parent pariahs in the pro-Linux community.

If SCO's mounting infamy - and legal bills in the millions - were not enough to bear, deeper problems were bubbling to the surface. Noorda, a former Novell CEO, entered his ninth decade of life suffering with his cognitive functions failing - and increasingly, the reins of Canopy were gripped by his protege, Chief Executive Ralph Yarro.

On Dec. 17, Noorda and his wife, Lewena - allegedly spurred on by daughter Val Noorda Kreidel - ousted Yarro, Chief Financial Officer Darcy Mott and corporate counsel Brent Christensen. In Yarro's place came Bill Mustard, a veteran executive with expertise in both turning around and liquidating troubled companies.

Yarro, who was not available for comment, and his associates sued for $100 million, claiming wrongful termination. The Noordas and Canopy countersued, alleging the trio had misappropriated nearly $25 million. It all seemed to have ended when an out-of-court settlement was announced March 11.

Yarro and company were out at Canopy, taking away an unspecified cash settlement in return for severing ties to all Canopy subsidiaries. Yarro also was given Canopy's 31 percent share of SCO stock, cutting the now-Noorda/Mustard-controlled Canopy from what some saw as a doomed, wounded albatross.

Then on St. Patrick's Day, Val Noorda Kreidel was found dead in her Huntington Beach, Calif., home, the victim of an apparent suicide. It was horrific irony: Shortly after the December coup at Canopy, a distraught employee also had shot himself to death.

Suddenly, Mustard's strongest tie to the Noorda family was gone. Just three months into his new job, the New York CEO found himself virtually alone at the helm of Canopy, with some 20 dependent subsidiaries seeking guidance as they sailed on now uncertain seas.

Mustard has steadfastly refused to speak with reporters, and he ignored repeated requests to comment for this story. But others - both those currently and formerly linked to Canopy - confess concerns about the tech umbrella's future.

Ron Heinz, president and CEO of Helius Inc., notes Canopy holds less than 5 percent interest in his company, so it could easily survive if the venture capital liquidated - as some analysts have predicted it will.

Still, Heinz wishes Canopy well.

"We're all deeply saddened by the most current events, to be sure," he says. "But I still think Canopy has a strong portfolio of companies that could be thriving entities."

So does Darl McBride, SCO's CEO.

"[Canopy's] influence on the technology industry will be felt for many years to come," McBride says. "We now look forward to working even more closely with Ralph Yarro as our largest shareholder and wish the Canopy Group continued success."

Ragula Bhaskar, president and CEO of FatPipe Networks, also hopes that "Canopy will remain a pillar of the tech community and continue to produce stellar companies."

It yet may, but the worst-case scenario of an exit by Canopy from the investment capital market would send ripples through the investment capital community, says Ed Ekstrom, former chairman of the Utah Information Technologies Association and a partner in the vSpring venture capital firm.

"They have been a very, very big contributor to the private equity market. Their approach and results speak for themselves - really high-quality companies and employment opportunities for the region," he says.

Some in the Canopy family, however, whispered about their fears for subsidiaries not yet profitable and dependent on the company for funding, administrative support and guidance. Complicating the matter, they say, is the close relationship many CEOs of Canopy offshoots had with Yarro - corporate links now cut by the coup and its aftermath.

Through its attorneys, the Noorda family declined to be interviewed.

However, Dion Cornett, an analyst with Decatur Jones, speculated that one the four Noorda sons will step into the vacuum left by their sister's death.

"I suspect that control remains with the family, and if that point person is not financially sophisticated, they may hire an adviser to assist," he says. "Technically, Canopy survives . . . but I don't know if it will remain an active investor."

Rob Enderle of the Enderle Group was more pessimistic, predicting the "most likely path right now is one of divestiture."

"The problem for Canopy is that the firm appears unstable now and that will make it difficult to attract and hold investors," he adds. "It certainly is possible to turn this around but that will be far from easy and the pressures to divest will be significant."

The Yankee Group's Laura DiDio, a longtime acquaintance of Ray Noorda, predicted it will be several months at least before anything new develops at Canopy.

"There will be quite a leadership vacuum and confusion," she says. "Bill Mustard [is left] with a plate that is not just full but overflowing with issues that need to be addressed."

In the long term, though, DiDio says a few scenarios suggest themselves. The Noordas could decide to sell all or parts of Canopy's portfolio, thought to be worth more than $300 million; or some portfolio member companies might seek a leveraged buyout from Canopy; or one of the Noorda sons might try to run the venture capital firm.

DiDio found the latter scenario the least likely, noting that unlike the late Val Noorda Kreidel, none of her brothers has shown interest.

"Canopy was always Ray Noorda's baby," DiDio says. "With Ray and all of his hand-picked executives out of the picture and the remaining Noorda offspring's relative inexperience and unfamiliarity with Canopy . . . I don't think the Noorda family has any immediate answers."


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