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Japan Game Software Firms Square, Enix to Merge
TOKYO, Nov 26 (Reuters) - 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.
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