Sega to Merge with Sammy

Sega to Merge with Sammy

Sega of Japan have announced that it plans to integrate its operations with those of Sammy Corp., a leading maker of pachinko machines, to become more competitive in the amusement business.The two Japanese companies said Thursday, Feb. 13, they would combine their operations by October to build a diversified amusement services business with a combined market value of $2.4 billion.

Sega would account for 54% of the total, but Sammy Corp. president Hajime Satomi would be CEO of the combined company. The two left open all other details including the type of merger. Possible methods of uniting the companies include a share exchange, an issue of new shares or the creation of a holding company. The companies plan to sign a formal agreement, which will cover the deal's structure, by May.

Sega, Japan's largest game arcade operator and creator of video game character Sonic the Hedgehog, has seen sales fall for the past two years partly because of unsuccessful entry into the home game software business.

Immediately after the merger announcement Sega slashed its profit forecast for the year ending March 2003 to ¥500 million ($4.1 million) from an earlier estimate of ¥5 billion, citing poor sales of its games in the U.S. The downgrade is the company's second in the current fiscal year.

The deal with Sammy comes as Japanese video game software makers face rising development costs to create games for advanced systems such as Sony Corp.'s PlayStation 2 and Microsoft Corp.'s Xbox in a saturated market. Facing the same problems, Sega's rival Enix Corp., known for its Dragon Quest series, and Square Co. Ltd., maker of Final Fantasy, plan to merge in April.

Sammy is a successful manufacturer of pachinko, electronic pinball machines, which has recently begun to diversify into game software and commercial game machines.

Zachary Ligget, game software analyst for WestLB Securities Pacific, said the company probably wanted to dilute its image as a pachinko maker by allying with a well-known game operator.

While pachinko is highly popular in Japan, the industry has an ambivalent image partly because of suspected ties with the world of yakuza organized crime, the Japanese equivalent of the mafia.

Sammy's market value is ¥132 billion, ranking it just behind Sega, which is worth ¥157 billion.

Sammy's sales more than doubled from ´78 billion in the year ending March 2001 to ¥164 billion a year later while sales at Sega shrank from ¥242 billion to ¥206 billion over the same period. Ligget said one of the main benefits of the merger would be a change of leadership at Sega.

Sega's woes last year led to speculation, denied by both companies, that Redmond, Wash.-based Microsoft Corp. might be interested in acquiring it.

SOURCES: Press release & www.thedeal.com