One of 2 things, actually.
Spirits Within didn't make NEAR what they expected(didn't even cover production costs), but FF8 also fell massively short of sales expectations. They probably could've handled 1, but not both.
...
Though the Square/Enix merger was a VERY logical move. It united 2 of the bigger names in the industry, and made a company that had both programming and publishing capabilities.
Before the merger, Enix had no programmers. Even their legendary Dragon Quest series was licensed out to other companies for development. And Square had no publishing facilities, relying on companies like Sony and Electronic Arts to publish for them.