Merlin
12-02-2002, 06:24 AM
From today's Financial Times....
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COMPANIES & FINANCE INTERNATIONAL: Risk-taking Square makes fit with Enix
By Michiyo Nakamoto
Financial Times; Dec 02, 2002
When Enix and Square announced their merger last Tuesday, the news stunned the Japanese computer games industry.
The highly fragmented games sector had been expected to face a shake-out sooner or later, but few people had imagined the market pressures were intense enough to bring together two companies as different as Enix and Square.
To be sure, both companies make phenomenally popular role-playing games that take a mind-boggling 80 hours or more to complete.
When a new Dragon Quest by Enix, or Final Fantasy game by Square comes out, sales of other software practically grind to a halt because gamers are locked in their rooms engrossed in their latest virtual adventure, says Jay Defibaugh at Credit Suisse First Boston in Tokyo.
But while Enix is known for its cautious management and penny-pinching, Square is a risk-taker that spends lavishly on its games.
Many analysts worry that the cultural differences will overshadow any benefits of a merger. "It will be a love-in for five minutes," says Ben Wedmore at HSBC in Tokyo.
The agreed all-share bid by Enix for Square - the deal is being billed as a merger - was intended to create the critical mass needed to meet the dual challenge of rising development costs and sluggish sales.
The planned merger is the first among quoted Japanese games developers, which suf fered a 13 per cent drop in domestic sales in the first half of the year at a time when costs were rising with the launch of new formats.
The combined entity will have a market value of about Y249bn ($2bn), ranking it fourth in the sector by capitalisation and fifth by sales. Enix is offering 0.81 of its own shares for each Square share and is issuing 40.8m new shares to fund the purchase.
As the technology for games hardware has become increasingly sophisticated, it has become much more costly and risky for software developers to come out with games that live up to the hardware's potential.
It costs at least Y100m to develop a single title, points out Shunji Yamashina, games analyst at Morgan Stanley in Tokyo. Costs can rise to as much as Y1bn a title for the more sophisticated games. Square spent more than Y3bn on its latest Final Fantasy games.
Square Enix is targeting sales of Y80bn by 2005 and net profits of Y15bn to give it the clout to compete with its larger peers.
Nintendo and Konami can afford to spend large sums on developing attractive software but there are hundreds of smaller developers that will be forced to seek larger partners to cover the costs.
"Critical mass is going to be more and more important as development costs rise and consumers become more fickle. There are a lot of companies that don't have the critical mass to survive," says Lisa Spicer, a games analyst at ING Securities in Tokyo.
Meanwhile, further pressure is coming from the impending launch of next generation games machines.
Sony is expected to launch its next games console in 2005, at which point sales of software for PS2 will drop dramatically.
Some smaller games developers will not be able to survive that downturn, Mr Yamashina says. "Consolidation will occur within the next 2 to 3 years," he says.
On top of the huge development costs they must shoulder, Japanese developers must expand overseas to make up for the decline in games sales in their home market.
There will be cyclical ups and downs in sales in Japan, but the overall market itself will not grow, Mr Yamashina says.
Unit sales of games in Japan have been on a steady decline from 98m in 1998 to 68.7m last year, according to the Dentsu Institute for Human Studies.
But few Japanese games developers have been as successful overseas as in Japan. Even Dragon Quest, which regularly tops the Japanese charts, has not made it big in the west.
If the new Square Enix manages to come out with even one of their two main titles each year, it will vastly improve earnings stability, says Mr Defibaugh.
Games analysts expect an increasing divergence between the winners, with their financial stamina, development capability and the top titles in their genre, and the losers, which will either be swallowed up by the larger, well capitalised companies or will perish.
Even Sega, which is one of the largest games developers, is the subject of speculation that it might be an acquisition target.
"You've got Microsoft with a big cash horde that needs content. Rare [which it took control of recently] was the first decent-sized investment. The next one could be a listed company," says Ms Spicer. "This is just the first shot in Japan. It will be followed by other deals."
================================
COMPANIES & FINANCE INTERNATIONAL: Risk-taking Square makes fit with Enix
By Michiyo Nakamoto
Financial Times; Dec 02, 2002
When Enix and Square announced their merger last Tuesday, the news stunned the Japanese computer games industry.
The highly fragmented games sector had been expected to face a shake-out sooner or later, but few people had imagined the market pressures were intense enough to bring together two companies as different as Enix and Square.
To be sure, both companies make phenomenally popular role-playing games that take a mind-boggling 80 hours or more to complete.
When a new Dragon Quest by Enix, or Final Fantasy game by Square comes out, sales of other software practically grind to a halt because gamers are locked in their rooms engrossed in their latest virtual adventure, says Jay Defibaugh at Credit Suisse First Boston in Tokyo.
But while Enix is known for its cautious management and penny-pinching, Square is a risk-taker that spends lavishly on its games.
Many analysts worry that the cultural differences will overshadow any benefits of a merger. "It will be a love-in for five minutes," says Ben Wedmore at HSBC in Tokyo.
The agreed all-share bid by Enix for Square - the deal is being billed as a merger - was intended to create the critical mass needed to meet the dual challenge of rising development costs and sluggish sales.
The planned merger is the first among quoted Japanese games developers, which suf fered a 13 per cent drop in domestic sales in the first half of the year at a time when costs were rising with the launch of new formats.
The combined entity will have a market value of about Y249bn ($2bn), ranking it fourth in the sector by capitalisation and fifth by sales. Enix is offering 0.81 of its own shares for each Square share and is issuing 40.8m new shares to fund the purchase.
As the technology for games hardware has become increasingly sophisticated, it has become much more costly and risky for software developers to come out with games that live up to the hardware's potential.
It costs at least Y100m to develop a single title, points out Shunji Yamashina, games analyst at Morgan Stanley in Tokyo. Costs can rise to as much as Y1bn a title for the more sophisticated games. Square spent more than Y3bn on its latest Final Fantasy games.
Square Enix is targeting sales of Y80bn by 2005 and net profits of Y15bn to give it the clout to compete with its larger peers.
Nintendo and Konami can afford to spend large sums on developing attractive software but there are hundreds of smaller developers that will be forced to seek larger partners to cover the costs.
"Critical mass is going to be more and more important as development costs rise and consumers become more fickle. There are a lot of companies that don't have the critical mass to survive," says Lisa Spicer, a games analyst at ING Securities in Tokyo.
Meanwhile, further pressure is coming from the impending launch of next generation games machines.
Sony is expected to launch its next games console in 2005, at which point sales of software for PS2 will drop dramatically.
Some smaller games developers will not be able to survive that downturn, Mr Yamashina says. "Consolidation will occur within the next 2 to 3 years," he says.
On top of the huge development costs they must shoulder, Japanese developers must expand overseas to make up for the decline in games sales in their home market.
There will be cyclical ups and downs in sales in Japan, but the overall market itself will not grow, Mr Yamashina says.
Unit sales of games in Japan have been on a steady decline from 98m in 1998 to 68.7m last year, according to the Dentsu Institute for Human Studies.
But few Japanese games developers have been as successful overseas as in Japan. Even Dragon Quest, which regularly tops the Japanese charts, has not made it big in the west.
If the new Square Enix manages to come out with even one of their two main titles each year, it will vastly improve earnings stability, says Mr Defibaugh.
Games analysts expect an increasing divergence between the winners, with their financial stamina, development capability and the top titles in their genre, and the losers, which will either be swallowed up by the larger, well capitalised companies or will perish.
Even Sega, which is one of the largest games developers, is the subject of speculation that it might be an acquisition target.
"You've got Microsoft with a big cash horde that needs content. Rare [which it took control of recently] was the first decent-sized investment. The next one could be a listed company," says Ms Spicer. "This is just the first shot in Japan. It will be followed by other deals."