The real reason from what I remember had to do with Disc 2 of Xenogears. If I remember correctly, Square didn't want to wait 6 months to a year for the team to finish Xenogears properly, so Square ordered them to fast track it (which of course ended in the mess that was Xenogears Disc 2). This didn't exactly please the Xenogears team, so they bought out the licence and formed their own team, Monolith (I think), so they could do all 6 Episodes of Xenogears the way they intended.

-Ryethe

P.S. Xenogears was episode 5 in case you were wondering. They have also said that they intend to redo episode 5.