By Alex Sloley
Peoplesoft’s radical plan to de-merge its non-core research and development activities into a separately listed company which PeopleSoft no longer controls (CI No 3,540) was initially met with raised eyebrows among industry watchers. Analysts participating in the hastily assembled conference call in mid- November reacted with a mixture of bewilderment and skepticism. What’s to stop us from simply adding back this company’s figures to your own to get back to the overall picture, said one analyst. Nothing, said chief financial officer Ron Codd, it’s a free country. The question was prompted by one interpretation of the deal whereby PeopleSoft craftily protects its core earning from the depressive effects of speculative R&D expenditure by pushing these costs into a separately listed, loss making company. The announcement caused barely a ripple in the press, but when shortly afterwards, PeopleSoft announced it would be re- pricing its employee stock options to absorb the huge declines in its stock price, the link between the two events began to look like slightly more than a coincidence. However, Ron Codd maintains that this is a gross over simplification of the drive behind the deal. Two weeks after the ‘Momentum’ de-merger was announced, Codd has had a chance to talk to his investors about what’s going on. The general reaction was at best mixed, he said. But he continues to fight his corner by pointing to the growth potential that Momentum offers. PeopleSoft will place $300m in cash into Momentum to kick it off, and Codd says this gives his stockholders a share in a $300m venture fund whose prime objective is to spend that money as fast as possible on developing new commercial ideas. This money will be outside PeopleSoft’s executive control, and therefore it will be protected from the tyranny of quarterly reporting. The option that PeopleSoft might cut back on this R&D work to cushion the results of a poor quarter will not be available. In this way, work on important new products will not be suffocated, says Codd. He also refutes the idea that there is anything underhand in the structure of the deal. PeopleSoft is using a publicly listed company as the vehicle, and so the detailed disclosures filed with the SEC will make it clear to all and sundry what the company is doing. If investors don’t like, or become confused by the complexity of the deal, they can simply sell their stake, says Codd, a CFO who has a refreshingly open attitude towards dealing with investors. And to his credit, he has never been a believer in the game of Wall Street winks and nods, where investment analysts are privy to information deemed too sensitive for the people who actually own the shares. However, the SEC, the US regulatory power house, has yet to be convinced of the merits of this deal. PeopleSoft has received advance clearance to de- merge the Momentum business, but says Codd, the staff at the SEC clearly didn’t like it. As usual, nobody in the chief accountant’s office of the SEC was willing to talk to the press about their opinions. But they will be watching developments very closely. As, it seems, are many other companies in the technology sector. Codd has fielded numerous calls from interested companies all of whom are intrigued by this idea. If Momentum achieves PeopleSoft’s aims, be they covert or overt, we will see a great many more of these R&D de-mergers. At which point the SEC will be forced to take a stance.
