Well you're mostly right. Tetsuya Takahashi and Hironobu Sakaguchi both left/stopped developing for Square after Xenogears and FFIX respectively. Takahashi left Square and co-founded Monolith Soft which initially worked with Namco to make the Xenosaga trilogy for the PS2. Nintendo would acquire his company years later. Sakaguchi founded Mistwalker who first worked on Xbox 360. I don't think any key Square employee went back to Nintendo after FFVII. As a matter of fact they hardly had any relation with them for two entire generations.
Square's merge with Enix did mark the company's semi-death but they still have enough talented people to make great games. They only need to bring them together.
Otaku is actually right: Entire teams left Square right after the failure of FF: The Spirits Within and before the merger with Enix, as he said the whole Xenogears/Chrono Cross Team (ended up as Monolith Soft.), the Mana Team (ended up as Brownie Brown) and the Super Mario RPG Team (ended up as Alpha Dream) and many, many more (Koichi Ishii @ Grezzo, Hironobu Sakaguchi @Mistwalker etc.)
....there is a reason why the quality of their games took a nosedive !
"....there is a reason why the quality of their games took a nosedive !"
I already explained why their games flopped, it is only partially due to the departure of some of the key people. But early 3D final fantasy games still rocked and they were mostly the work of employees who are still working in the compnay today. Final Fantasy VIII team leaders are still here! every single one of them. Takashi Tokita of FFIV is also leading one of Square Enix' divisions.
Bring Takashi Tokita, Nojima, Nomura, Ito, and Kitase (as director! Producing is crap) with Nobuo Uematsu as the music composer, and we may still get a top quality video game.