By Alex Sloley
Worried by the low valuation of its shares and its growing pile of worthless employee share options, PeopleSoft Inc has concocted a fabulously complex scheme to protect its core earnings from the costs of speculative future research and development work. In a scheme that shows genuine brilliance in accounting innovation, tinged with a substantial measure of sheer desperation, PeopleSoft said yesterday it intends to form a separately listed research and development company to take charge of new research projects in the high growth areas of electronic business, analytic applications and vertical market software applications. In essence, Peoplesoft is dumping its speculative, but potentially lucrative, new product ideas into a separate company, but with the crucial caveat that it can buy back some or all of the resulting products should they turn out to be winners. In the meantime, PeopleSoft’s core business results will be unencumbered by excessive R&D expenses. The new company, named Momentum Business Applications Inc, will receive $300m in cash (around half of PeopleSoft’s current cash reserves) and a single token employee; at which point it will be completely demerged from the parent company and handed over to PeopleSoft’s existing shareholders for them to trade the shares freely on the Nasdaq exchange. In a special distribution expected to happen at the end of the year, PeopleSoft shareholders will receive one share of Class ‘A’ common Momentum stock for each 50 PeopleSoft shares owned, a total distribution of around 4.66 million shares. But the new company is unlikely to have any employees other than its own yet-to-be appointed president, and will be outsourcing all of its development work, most of it to Peoplesoft itself. Momentum will work only on new products, with a small amount of software in the very early stages of development transferred over from the parent company. The work carried out under Momentum’s name is expected to supplement existing PeopleSoft efforts, such as the recently announced PSBN PeopleSoft Business Network electronic business initiative (CI No 3,530), the Enterprise Performance Management family of analytical applications, and vertical market applications such as that produced by Intrepid Systems Inc, which PeopleSoft recently acquired. Initially, Momentum will be run by Aneel Bhusri, senior VP of product strategy, business development and marketing. The first products are likely to emerge towards the end of next year, but the funding is expected to be sufficient for a three to four year development effort. PeopleSoft will have the option to license any Momentum products and technology, for which it will have to pay royalties for the first year. After that it will have a further option to buy up the products for direct ownership. It will also have the option to repurchase all Momentum shares at a price set according to a pre-determined formula.
Biotech model
PeopleSoft claims to have modeled the unusual transaction after similar spin-offs in the biotechnology and pharmaceutical industries. It claims the reason for the move is to specifically earmark new funds for new projects and separate them from its core research and development effort, in which it will continue to invest at a rate of between 14% and 17% of total revenues over the next year. Ron Codd, PeopleSoft’s CFO, explained it as a ring fencing of substantial funds which might otherwise face competition from existing products with a more predictable pay back attached. Dave Duffield, PeopleSoft president and CEO, said the move would provide direct benefits to PeopleSoft shareholders and to our customers. PeopleSoft has accumulated a sizable cash pile over the last few years, and says that it evaluated a stock re-purchase, but decided that such a move would have a very limited impact on shareholder value. According to Duffield, the demerger will enable it to more aggressively pursue new R&D opportunities while providing shareholders additional alternatives for investment in the future of PeopleSoft. A more cynical explanation for the transaction is that Peoplesoft wants to transform a sizeable chunk of its quarterly R&D expenses into two or three ‘one-time’ charges (spread over three to four years) which investors will dutifully discount, leaving PeopleSoft’s shares free to benefit from the core business results. One charge, of potentially $75m, will arise on completion of the demerger, and one or more future charges will arise upon the repurchase of selected products from Momentum. PeopleSoft has exclusive purchase rights over any of Momentum’s successful developments, and it has every intention of buying back the ones that fly. á
