Posted at 10:40 p.m. PST Thursday, February 18, 1999
PeopleSoft's party may be
premature
BY ADAM LASHINSKY
Mercury News Staff Writer
PEOPLESOFT Inc. (Nasdaq, PSFT) excitedly announced
Wednesday that the Securities and Exchange Commission had
completed a review -- in PeopleSoft's favor -- of the software
maker's past merger accounting. Hurray. Now why won't
PeopleSoft talk about an initiative by the Financial Accounting
Standards Board that could undo the company's fancy accounting
footwork in another instance?
While PeopleSoft received a clean bill of health for past in-process
research-and-development charges, a close read of a proposal by
the FASB -- the accounting industry's standard-setting body --
suggests PeopleSoft's new Momentum Business Applications
Inc. (Nasdaq, MMTM) spinoff conceivably could be forceably
spun back into the parent company.
For investors, a reversal of fortune for the hopefully named Momentum simply would mean the end
of a maneuver many considered tricky in the first place. For PeopleSoft, a negation would mean
another embarrassment for a company that's already taken its knocks.
To review, PeopleSoft said last year it would contribute $300 million to Momentum, which it would
spin off to shareholders as an entity existing solely to conduct research projects for PeopleSoft.
Momentum has one employee, former PeopleSoft Chief Financial Officer Ronald E.F. Codd, and
no plans to hire more. It will use its kitty -- since reduced to $250 million -- to pay PeopleSoft to
conduct the R&D Momentum was set up to do.
Confused? The reason for the R&D-funding switcharoo is straightforward: By shifting R&D
expenses to this supposedly independent company, PeopleSoft removes those expenses from its
income statement, thus boosting its future earnings.
''It's certainly done with the intent of shifting expenses off their books,'' says accounting maven
Howard M. Schilit, who runs the for-profit research boutique Center for Financial Research and
Analysis in Rockville, Md. ''If you were to visit the headquarters of this newly formed company,
would you even find a filing cabinet?''
PeopleSoft didn't invent the off-income-statement spinoff technique. The biotechnology industry has
been using it for years. But its timing may not be ideal as it coincides with the SEC's heightened
scrutiny of technology-company accounting practices.
Jeffrey O. Henley, chief financial officer of Oracle Corp. (Nasdaq, ORCL), says he wasn't aware
the technique was possible and condemns PeopleSoft's maneuver as an ''illusion.''
Where the sleight-of-hand will be tested is in the FASB's review of what it means for one company
to control another. An FASB committee working on a new definition of control will release its
proposal next week. A draft copy, posted at
www.rutgers.edu/Accounting/raw/fasb/project/consol.html, defines control as ''the ability of an
entity to direct the policies and . . . ongoing activities of another entity so as to increase its benefits
and limit its losses from that other entity's activities.''
Although PeopleSoft has been careful to suggest Momentum is independent, the fact remains that
PeopleSoft has the right to buy all of Momentum's technology and even to repurchase Momentum.
And although PeopleSoft has off-loaded some of its R&D expenses to Momentum, it will collect
revenues when the spinoff pays for PeopleSoft's workers to do its research.
Wall Street generally yawns at the accounting maneuver. But if the FASB and eventually the SEC
determine that PeopleSoft ''controls'' Momentum, the parent will be forced to add back in
Momentum's expenses.
''If that happens then this whole thing probably wasn't worth the effort,'' says James A. Moore,
software analyst with BT Alex. Brown in San Francisco. ''I'm going to consolidate it up anyway. I'll
give people two numbers, one with Momentum, and one without.''
PeopleSoft, chatty about its in-process R&D victory earlier in the week, declined to comment on
Momentum and the FASB's efforts at defining control.
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