Neowin.net

Japanese software maker Namco Ltd , known for its "Tekken" fighting games, said on Thursday it wants struggling fellow game maker Sega Corp, creator of "Sonic the Hedgehog," to reopen merger talks.

A deal would torpedo Sega's planned October union with pinball machine maker Sammy Corp, a move widely seen as a takeover of Sega by financially sound Sammy.

Sega said it is studying Namco's proposal but has not set any deadline for a decision.

The move underlines the intense rivalry and difficulty of making profits in Japan's $5 billion a year game software industry, and follows the April 1 merger of two popular videogame makers that created third-ranked Square Enix Co

A Sega-Namco merger would rank fifth in the Japanese market with annual sales of 350 billion yen ($2.9 billion) and market capitalization of $1.74 billion, similar to that of Square Enix.

"We are certain that consolidation of the two companies' operations in every business field would bring about maximum synergy effects," Namco said in a statement.

News source: Reuters - Gamemaker Sega Courted by 'Tekken' Creator Namco

But analysts say simply getting bigger is not enough in the harshly competitive industry, dominated by software giants such as Nintendo Co Ltd and Konami Corp

"It (Sega-Namco) is a combination of two weak companies. It won't make sense if they aren't ready to embark on restructuring measures following the merger," said Eiji Maeda, an analyst at Daiwa Institute of Research.

Although it is Japan's largest game arcade operator, Sega has had poor business results since its American football videogame flopped in the U.S. market last year.

BIGGEST IN ARCADES

In terms of software sales, ninth-ranking Sega and eighth-ranking Namco would have a combined market share of only about 10 percent. In the less profitable arcade game business, the two firms are likely command a 30 percent share, emerging as the biggest game operator in Japan.

Namco said in a statement it had recently approached Sega and resumed merger talks that began last year but had been temporarily suspended at the request of Sega.

"If it happens we would view it as positive for both firms' shares. We're especially interested in potential synergies between their arcade games and amusement facilities businesses," said game software analyst Takashi Oya of Deutsche Bank Group.

Sega and Namco have been in a comprehensive alliance pact in the arcade game business since September 2001.

Namco's aggressive approach appears to confirm speculation that Sega's merger talks with Sammy, Japan's biggest maker of pinball-style "pachinko" game machines, are not going smoothly.

Some of Sega's board members, shareholders and software developers are said to oppose the deal, seeing little merit in a merger with Sammy focusing on pachinko equipment.

Sega's talks with Sammy have been given a thumbs-down by investors, who pushed the shares of both companies to record lows after an announcement in February of their planned merger.

Thursday's news boosted shares of both Namco and Sega on the Tokyo stock exchange, Namco gaining 1.3 percent to 1,799 yen and Sega jumping 15.72 percent to 736 yen. The benchmark Nikkei average fell 0.73 percent.

Financial daily Nihon Keizai Shimbun said on Thursday that Namco had proposed a merger to take effect early next year, with Sega the surviving entity.

It would enable Namco to consolidate maintenance and distribution networks and strengthen game software development capabilities, the paper said.

Sega, which posted its fifth consecutive annual net loss in 2001/02 and is due to redeem 50 billion yen in convertible bonds in June 2004, recently cut its profit forecast for the year that ended on March 31 by 90 percent.

The Asian Wall Street Journal reported last month that both Microsoft Corp and U.S. game maker Electronic Arts Inc were considering "white knight" bids for Sega.