No doubt this is news for an analyst rather than a gamer, but in the gaming community the facts within
could be very telling for the future of video games . . .Japanese game software
makers Enix Corp, known for its blockbuster “Dragon
Quest” series, and Square Co Ltd , maker of “Final
Fantasy“, said on Tuesday they would merge to help fight off intense
competition. Enix and Square said the deal would be worth about 89 billion yen
($727 million) based on Enix’s pre-announcement share price.

The pact comes as Japanese video game software makers are facing rising development
costs to create games for advanced systems such as Sony Corp’s PlayStation 2
and Microsoft Corp’s Xbox in a heavily saturated market. With Sony and Microsoft
both gearing up online game services, software publishers are also feeling pressure
to develop costly network games to pave the way for future growth. “We’re
going on the offensive with this merger. This will make our strengths complement
each other,” said Square President Yoichi Wada, who will become president
of the new firm. . .

Wada told reporters that Square had a leading position in the online game market
as well as strong name recognition in Europe and North America, while Enix had
been successfully operating network games for personal computers in Asia. The
stock market gave the deal a high score, but analysts had mixed views. Enix
shares, which stood at 1,821 yen by midday, shot up by their daily limit of
300 yen or 16.0 percent to 2,175 yen, while Square shares rose 6.42 percent
to close at 2,005 yen.

“The merger is seen as a positive move for both companies as it will provide
ample funds to cash-strapped Square while helping to smooth wide earnings swings
at Enix, which depends solely on Dragon Quest sales,” said Takeshi Tajima,
analyst at BNP Paribas.

STABLE EARNINGS

Enix is known for stable earnings. It has never posted a loss since it became
a listed company in 1991 and its cash reserves stood at 38 billion yen ($311
million) as of September. But Takashi Oya, at Deutsche Securities, described
the deal as a “virtual” merger and expressed doubts about
the benefits.

“Enix outsources game development and has few in-house creators, while
Square does everything by itself. The combination of the two provides no negative
factors but would bring little in the way of operational synergies,” he
said.

Under the deal, one Square share will be exchanged for 0.81 share in Enix,
which will be the surviving entity. Enix will issue 48.76 million new shares
to swap for shares in Square. Deutsche’s Oya said the deal would create a company
with a sizable market capitalisation, making it more attractive to investors.
The combined companies have a market capitalisation of about 223 billion yen
($1.8 billion) at Monday’s share prices.

Nintendo Co Ltd, with a market capitalisation of 1.8 trillion yen, is the biggest
gamemaker listed in Tokyo.

Enix and Square both enjoy solid sales from their million-seller game series
but their dependence on big hit games also makes profits vulnerable to sudden
shifts in demand.

“Enix has a strong eanings record and our profits are quickly recovering,”
Wada said. “We will keep high profits in the next few years and will step
up development of innovative games.”

The new firm, Square Enix, is aiming for an operating profit of 18.5 billion
yen on sales of 61 billion in 2003/04 to March and 27 billion yen profit on
80 billion yen sales in 2004/05.

Square, which lost 16.6 billion yen last year after an unsuccessful foray into
movie making, received a 14.9 billion yen funds injection from Sony last year
to strengthen its capital and financial footing.

SALES FALLING

Sony’s game-making unit, Sony Computer Entertainment, which owns 18.6 percent
of Square, said it welcomed the deal as its business partners would be reborn
as a stronger company. Enix and Square, along with another gamemaker, Namco
9752.T , agreed last year to collaborate on operations. The officials said the
latest deal would not include Namco.

With tough market conditions, some financially weak software makers have already
chosen to become part of bigger players. Small software firm Hudson Soft Co
Ltd, for example, last year became part of Konami, the maker “Metal
Gear Solid” games.

In the six months to September, Japanese game software sales fell 13 percent
to 114 billion yen despite growth in sales of the three major home game consoles,
which also includes Nintendo’s GameCube, according to game magazine publisher
Enterbrain. Sega Corp’s chief operating officer, Tetsu Kayama, has forecast
more consolidations in the industry as many small firms cannot afford rising
development costs.

Source: Reuters

Filed under: News

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