The Return of Mergers
April 22, 2003

Welcome back to a totally revamped... okay, it's the exact same editorials section, but under new management. But just so you don't freak out, we have an editorial by the last person to do an editorial on this site... all the way back in December of last year. And to make you even more comfortable, it's on the exact same topic: video game company mergers! And this time he's tackling the rumors regarding Sega, Sammy, and Namco. There's also good info regarding Capcom. It's quite well written and Chris is quite well-informed, so without much adieu, on to the mergers... part 2.

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While the merger between Square Enix already sounds like ancient history despite an official start only earlier this month, the wheeling and dealing in Tokyo continues. Two months after Sega silenced all rumors by announcing its desire to merge with Sammy this fall, the "who with whom" question is again hot. Last week, the public learned that, already prior to holding talks with Sammy, Sega had been approached by Namco regarding a possible merger. After Sega asked Namco to put a hold on any further negotiations last fall, Namco's official announcement of a proposal easily was last week's top news story, even receiving the honor of being mentioned, albeit shortly, by the world's No.1 news (and live-war coverage) cable network CNN.

As if there wasn't already enough talk going on, the Nihon Keizai Shimbun and various other publications on both sides of the Pacific continued to supply everyone interested in more theories with further partners. Apart from a name that has been mentioned in such scenarios for ages (Microsoft), Electronic Arts was also mentioned as being interested in acquiring Sega (thereby shutting down the first competitor for its own EA Sports titles and gaining access to the only market which EA hasn't conquered so far: Japan). And all this at a time, when another behemoth among Japan's 3rd party publishers is struggling through a financial crisis of serious dimensions. While Capcom had projected losses of more than 100 million USD for the last fiscal year, weaker-than-expected sales of key titles resulted in a loss of 163 million USD and the cancellation of 18 titles currently in development (Capcom had about 100 titles in development, prior to the announcement.) While the company has yet to announce which games have been scrapped, the situation must be pretty serious; no company would routinely cut 20% of its current line-up in development. The result would be essentially turning an investment (decent sales of the respective software provided) into a waste of (financial and human) resources. Capcom's management though, concludes each press release or press briefing with the notion that the company is strong enough to survive on its own and hence had no intention to seek partners to merge with or take over.

So again, we might want to ask the question, "who will end up with whom"? While only Sega's board of directors (which is poised to make a decision regarding the merger on Wednesday) knows or will know the truth, here are a few arguments for and against one or the other partner:

Sega desperately needs cash, which Microsoft or Sammy could probably provide more easily than Namco or Electronic Arts. However, Namco as a fellow Japanese third party publisher rightfully argues that the synergy effects resulting from a merger would be greater than in the case of a Sega-Sammy tie-up scenario. Despite developing and publishing games (mainly for PlayStation 2), Sammy's core business has always been Pachislot and Pachinko machines rather than home console or arcade videogames, the two core fields of Namco's business. A Namco-Sega tie-up would not only create Japan's largest third party publisher, but also a mighty force on the arcade market, since after Capcom's exit only Konami poses a significant threat to either Namco or Sega. Microsoft could offer Sega A LOT of cash, however very little else. Microsoft's bids to take over Square, Capcom, and Namco prior to Xbox's launch were anything but successful, and despite the console's remarkable success in North America, it's been a no-factor in Japan ever since its February 22nd release (the console has yet to reach sales of 400,000 units in Japan; for reference, the Dreamcast's installed hardware base of slightly above two million units in Japan was already considered negligible by most analysts).

Sega's over-confidence regarding the North American sales of its Visual Concept-developed sports franchises definitely took its toll on the company's financial results for the fiscal year 2002/2003, but the development on their home market (declining sales and no sign of a short-term revival), is causing managers in Tokyo, Osaka and Kyoto far more sleepless nights than the North American and European markets, whose growth continued in 2002. In addition to Microsoft's neglible market share in Japan, a merger between a 1st and 3rd party company seems even less unlikely due to an even more obvious reason: The lack of freedom. The entire concept of 3rd party publishers is based upon independence and freedom of choice; the very choice that allowed them to desert Nintendo at the end of the 16-bit era in favor of Sony. For Microsoft (or any other 1st party for that matter) it doesn't make sense to throw money after a company unless you get a lot of exclusives for your console in return. Hence, the odds of a merger involving Microsoft seem rather slim to me.

We will only know for sure tomorrow of course, but it should be very hard for Sega's board of directors to turn down Namco's offer and finally get one step closer to the aim that COO Tetsuya Kayama had laid out on the very day Sega abandoned the hardware business and became a third party publisher: to dethrone Electronic Arts and become the world's No.1 third-party publisher. While this should be a tough task given EA's strength in both the console and PC segment and most Japanese companies' focus on the console sector, Sega-Namco could at least claim to be Japan's No.1.

- Chris Winkler

I would really love to see Sega and Namco merge for two reasons. First, Namco and Sega both make GREAT arcade games and combining their talents might result in greater heights of excellence. Imagine the makers of Virtua Fighter and Soul Callibur joining forces to rock the arcades with an over the top fighter. Or we could just get more trash like Tekken 4, but that's just this editor's opinion. I just hope one way or another Sega gets saved. Guess we'll have to wait and see.


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