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When will


(MMTM) - Get SPDR S&P 1500 Momentum Tilt ETF Report

start living up to its name for







announced Jan. 24 that it would buy back Momentum Business Applications, a company it spun off in 1998, the software maker's shares have continued on a downward slide. Wary of accounting issues in the era of


and confused by how the acquisition will affect PeopleSoft, many investors are simply staying away.

The Momentum spinoff has raised eyebrows in the past about whether PeopleSoft was using it as a

shelter from high software-development costs. Now that PeopleSoft is ending the relationship, investors are wondering what the impact will be on PeopleSoft's bottom line.

"I think they've got to resolve

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the question of handling Momentum costs, and clearly in the Enronitis environment we're in now, anything that smacks of or hints at off balance sheet is something you want to be out of," said analyst Ian Morton of J.P. Morgan H&Q. He rates PeopleSoft long-term buy and his firm has no banking relationship with PeopleSoft.

PeopleSoft shares rose 0.2% Tuesday to close at $30.32. But that's still down 21% percent from Jan. 24's close of $38.43 and down nearly 25% from Dec. 31. By contrast,


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has seen its shares rise 14.5% and



shares have gone up 20.4% since the beginning of the year.

A 'Battleground Stock'

Ian Murray, a portfolio manager at Straus Asset Management in New York, says he's avoided PeopleSoft, which he calls "a battleground stock. People are very passionate on both sides, so it becomes a very difficult stock to take a position in."

"You can talk to intelligent people on both sides and both sound correct," Murray said. And he was among the investors who said PeopleSoft was "pretty good" at explaining how the Momentum acquisition will affect its income statement at a technology conference last week.

Trip Chowdhry, an analyst at a New York hedge fund, acknowledges he doesn't have the accounting expertise to fully decipher PeopleSoft's explanations for Momentum, and that's enough to turn him off the stock. "We were thinking of buying PeopleSoft, but after these events and listening to what we have heard, we don't want to put money where there is even a hint of accounting issues," he said.

PeopleSoft may be able to close the final chapter on the Momentum saga this quarter, when it plans to purchase the spinoff for $90 million. With $250 million in funding from PeopleSoft, Momentum paid PeopleSoft to write code for PeopleSoft Version 8, racking up between $25 million and $30 million in net losses each quarter for the past year.

Those payments for staff and equipment were booked as revenue by PeopleSoft, which took a $175 million charge in 1998 to spin off Momentum. Although this was legal at the time, the

Securities and Exchange Commission

has since barred companies from such practices.

The question that has confused Chowdhry and others is what will happen to PeopleSoft's income statement now that it's pulling Momentum back into its fold. PeopleSoft maintains the Momentum acquisition will have "no material effect" on its income statement, although it says it will not lay off any employees.

The $90 million that PeopleSoft is paying for Momentum would have otherwise been incurred in royalty payments to the company, said PeopleSoft spokesman Steve Swasey. But the question remains, what happens to Momentum's $25 million in quarterly R&D costs?

Asked that at a Banc of America Securities technology conference last week, David Sankaran, PeopleSoft's vice president of investor relations, suggested that PeopleSoft had accounted for Momentum expenses on its income statement under a line called "cost of development and other services," which totaled $16.9 million in the fourth quarter.

PeopleSoft accounts for its own research and development costs on another line called "product development expense," which totaled $75.2 million in the fourth quarter. PeopleSoft expects the total of those two lines, about $91 million, to remain constant, as costs associated with Momentum disappear and migrate from the first line to the second.

Sankaran was unavailable for follow-up questions, and spokesman Swasey said the company is declining to talk any further about how Momentum affects the company's income statement. "As a matter of course we're not getting into that level of detail," he said.

Mo's Side Effects

Analysts say PeopleSoft will have to either increase revenue or cut costs to offset the effects of the Momentum acquisition.

Bob Austrian, managing director at Banc of America Securities, is expecting a decline in R&D spending. "I've generally cut expenses and been more cautious on revenues," said Austrian, who has a market perform rating on PeopleSoft. "I think that it's more likely that revenue growth is more difficult but can be accommodated through lower costs." His firm has no banking relationship with PeopleSoft.

PeopleSoft, which exceeded analyst expectations nine quarters in a row, has projected a 15% increase in license revenue in 2002, and 10% growth in service revenue. The company forecast operating margins will increase in 2002 to 15% from 12% last year.

Analyst Morton suggested PeopleSoft no longer will need all of its engineers who had worked under Momentum on PeopleSoft 8, comparing them with a crew constructing a new building. "You probably don't need to keep those people on the payroll because the building is built," Morton said.