Japan's Square Enix Courts Tecmo

How can Japanese video game companies stay competitive in a crowded global market? “You need a certain amount of scale,” says Square Enix’s President Yoichi Wada. The recent blitz of merger activity in the gaming industry proves that Wada isn’t the only one thinking this. Last month, U.S.-based Activision merged with Blizzard, the gaming unit of French media group Vivendi. And sports-franchise specialist Electronic Arts and “Grand Theft Auto” creator Take-Two Interactive Software are in talks about a potential tie-up.

No surprise, then, that Square Enix is exploring acquisitions of its own. On Aug. 29, the Tokyo company offered to buy Japanese rival Tecmo, a deal that’s worth more than $100 million. At a press conference, Square Enix’s Wada said his company’s role-playing fantasy games such as “Final Fantasy” and “Dragon Quest” and Tecmo’s expertise in fighting games (“Ninja Gaiden”) would make a good match.

Wada repeatedly stressed that the offer was for a “friendly” takeover. He hopes to buy all of the company’s shares but, if that’s not possible, said he would settle for a majority. “I’m awaiting a response [from Tecmo’s management],” he said. “I believe it will happen. I’m praying.”

Square Enix has offered to pay 920 yen ($8.44) for each Tecmo share, which amounts to about a 30% premium. It has enough cash on hand to pull off the transaction without relying on outside financing, Wada said. Square Enix shares ended the day up 2.6%, while Tecmo’s finished 14% higher.

Wada first raised the possibility of a tie-up with Tecmo Chairman Yasuharu Kakihara back in May. But it was Tecmo President Yoshimi Yasuda’s unexpected resignation on Aug. 20 that forced Wada’s hand. Wada said he equates Tecmo’s creative team--not its franchises--as its biggest asset, and appeared to be trying to ease Tecmo employee’s worries about the management upheaval in their midst. No doubt the last thing he wants to see is an exodus of talent before he scoops up the company.

Analysts, many of whom expect Square Enix to raise its full-year forecasts, applauded the deal. JP Morgan’s Eiji Maeda said: “It’s very easy to see what Wada wants from this. I think the two companies complement each other. Normally I get investors asking me to explain the merits of a merger. I don’t think that will be necessary here. When you think about what companies would be a good fit with Tecmo, Square Enix tops the list. There’s a synergy in the companies’ roster of games. It’s very different from, say, a non-Japanese game company approaching Tecmo with an offer to buy just its franchise of games but not the other assets.”

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