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PeopleSoft to form new R&D company

The software maker will spend $300 million to create a new firm focused on developing e-commerce, analytic programs, and other industry-specific business software.

PeopleSoft is spinning off its research and development efforts in order to jump-start its technology advancements.

Called Momentum Business Applications, PeopleSoft is turning research and development loose to let it focus on quickly developing technology for such hot areas as e-commerce, analytic applications, and industry-specific applications.

"Momentum will allow PeopleSoft to more aggressively pursue strategic R&D opportunities while providing our shareholders additional alternatives for investment in the future of PeopleSoft," said Dave Duffield, PeopleSoft president and CEO. "With this announcement, PeopleSoft is sending an unambiguous message to our customers, partners, and competitors that we are absolutely determined to deliver comprehensive and innovative enterprise solutions to meet the needs of customers today and in the future."

PeopleSoft needs to rev up its development effort. The Pleasanton, California-based firm has lagged behind its competitors like SAP and Oracle on most major technology fronts the past few years, making "me too" announcements long after its competitors.

PeopleSoft was last to market with manufacturing application and still lacks some key components, last to develop a three-tier architecture, and last to announce business analysis tools. Also, as SAP, Oracle, and Baan were buying and building front office applications like sales force automation, PeopleSoft chose to weaken an existing partnership with leading front office vendor Vantive by expanding the partnership to include Vantive chief rival Siebel. Now PeopleSoft is juggling the competitors and not offering its own customers anything more than interfaces to Vantive's or Siebel's products, according to analysts.

"If PeopleSoft can instill an entrepreneurial spirit in Momentum and can figure out how to successfully transfer technology from Momentum back into PeopleSoft, Momentum should help PeopleSoft to more aggressively pursue leading edge strategic R&D opportunities," according to AMR Research, a Boston analyst firm. "A young company free from large company bureaucracy typically moves faster and more aggressively than a large established company. However, PeopleSoft will have to carefully manage competition between its existing internal R&D organization and Momentum in order not to create an uncooperative internal R&D organization rife with 'not invented here' syndrome."

The new company is being set up so that it can enter into "development agreements in which PeopleSoft and possibly other third parties will undertake research and development activities on behalf of Momentum. PeopleSoft will have the option to license any products and technology developed by or at the direction of Momentum, and will also retain an option to purchase all of the Momentum shares at a price set according to a predetermined formula," according to company executives in a prepared statement.

PeopleSoft is expected to distribute Momentum stock to current holders of PeopleSoft stock by the end of the year.

Before that, PeopleSoft executives said the firm would contribute $300 million to Momentum. Holders of PeopleSoft common stock will then receive one share of Momentum Class A Common Stock for each 50 shares of PeopleSoft stock outstanding as of a specified date.

Based on approximately 233 million shares of PeopleSoft stock outstanding as of October 31, about 4.66 million shares of Momentum stock are expected to be issued. PeopleSoft shareholders will not have to pay for the new stock but it will be treated as dividends for tax purposes.

"Shareholders have been interested in how we intend to use the sizable cash reserves the company has accumulated over the past couple of years," said Ron Codd, PeopleSoft senior vice president and CFO. "We evaluated a stock repurchase program, but determined that such a program would most likely have a very limited impact on shareholder value. We believe this structure has the potential to create much more substantial and sustainable future value for our shareholders."