Oct. 1 (Bloomberg) -- Koei Co., a Japanese video-game software maker, said it plans to reorganize into a holding company in spring after merging with Tecmo Ltd. to compete in the $28 billion market.

Koei and Tecmo will swap their shares for stock in the holding company, Kenji Matsubara, president of Kanagawa-based Koei, said in an interview on Sept. 26. Tokyo-based Tecmo said Sept. 4 it rejected a takeover offer of 920 yen per share from Square Enix Co. in favor of merger talks with Koei.

``I can't give an absolute value for Tecmo shares because the swap ratio will depend on market prices, but I doubt it will fall below 920 yen,'' Matsubara said. The companies will make details known in November, he said.

The merger will create a company with games including the ``Dead or Alive'' fighting series and legend-based titles such as ``Romance of the Three Kingdoms.'' Japanese makers are following overseas rivals in teaming up to share costs of developing games for the most advanced consoles from Sony Corp. and Microsoft Corp. that offer higher-definition images and faster speeds.

Koei, whose market value exceeds Tecmo's more than fourfold, rose 1.3 percent to close at 1,376 yen on the Tokyo Stock Exchange. Tokyo-based Tecmo climbed 6.1 percent to 870 yen, taking its gain since Square Enix's Aug. 29 offer to 23 percent.

Survival Instincts

``In the 3 trillion yen ($28 billion) global games market, we have revenue of 40 billion yen, which begs the question of whether we can survive,'' Matsubara said. ``We plan to make the most of this merger and move on to the next step, which may include acquisitions.''

Japan's Nikkei 225 Stock Average, which lost 4.1 percent yesterday, gained 1 percent today after U.S. stocks surged the most in six years on speculation lawmakers will salvage a $700 billion bailout plan for banks.

``The recent share-price decline due to tumultuous market conditions shouldn't affect our merger plan with Tecmo,'' spokesman Takeshi Hiratsuka said by phone yesterday.

Norihiro Mukai, a Tecmo spokesman, said both companies have formed a committee to discuss the merger and declined to provide more details before their planned announcement in November.

Koei, the eighth-biggest publisher in the Japanese video- game market dominated by Nintendo Co., in May forecast net income would rise 24 percent to 6.5 billion yen in the year ending March 31. Tecmo, which isn't ranked among the top 10, projected full- year profit would gain 0.8 percent to 1 billion yen.

To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net; Kiyotaka Matsuda in Tokyo at kmatsuda@bloomberg.net.

Last Updated: October 1, 2008 02:47 EDT