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Competition







In a deal worth $727 million, Japanese game maker Enix has announce plans to acquire Square Co. Ltd. The companies hope that by combining operations, the resulting firm will be better positioned to compete against the pressures of inten
se competition and rising development costs. "We're going on the offensive with this merger. This will make our strengths complement each other," Square President Yoichi Wada told Reuters. The merger is to be finalized on April 1, 2003 and will result in the new entity of Square Enix.

Reuters Article:

  
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.

September 20, 2002

Jim - News Contributor, GameCubicle


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