Shares of Sega Corp, Japan's third-largest maker of video games, surged as much as 15 percent to their biggest gain in three months after the Asian Wall Street Journal said Microsoft Corp and Electronic Arts Inc may make separate bids for the Tokyo-based company.
Any bid either from Microsoft, the world's largest software maker, or Electronic Arts, the largest video-game developer in the US, would have to counter Sega's plan to merge with Sammy Corp in a transaction worth at least US$1.1 billion.
Higher development costs are forcing some video-game makers into mergers or bankruptcy as competition grows in the US$20 billion a year game industry. Microsoft, whose Xbox console sales in Japan have failed to meet the company's expectations, has been buying game designers to bolster its game lineup and spur console sales.
"For Microsoft and Electronic Arts, there's quite a lot of synergy if they were to buy Sega," said Toru Hashizume, an analyst at Tokyo Mitsubishi Asset Management Ltd. "Microsoft needs big software titles for its Xbox."
Sega, the creator of game character "Sonic the Hedgehog," hasn't been approached by either of the US companies, spokesman Masato Suzuki said, adding the company intends to pursue its planned merger with Sammy, a maker of pachinko pinball machines.
Microsoft spokesman Matt Pilla declined to comment. Trudy Muller, a spokeswoman for Electronic Arts, had no comment.
Sega shares rose ?100 (US$0.85) to ?740 in morning trading on the Tokyo Stock Exchange, their daily limit according to exchange rules. Sammy's shares rose as much as 7.6 percent.
Speculation that a rival game maker may buy Sega is not new.
In December 2000, the New York Times reported that Japanese rival Nintendo Co, the world's second-largest console maker, was in talks to buy Sega for US$2 billion. The companies denied the report.
On Nov. 29, Sega's shares surged 11 percent on market speculation that Redmond, Washington-based Microsoft was about to buy Sega. The companies again rejected the reports.
Microsoft and Electronic Arts are yet to make a formal approach to Sega, the Asian Wall Street Journal said, citing people familiar with the situation.
An acquisition would give either US company control over titles such Shinobi, a Ninja action game, and boost their business in Japan, where Microsoft is struggling.
Last year, Sony sold about 3.67 million PlayStation 2 consoles in Japan, more than 10 times Microsoft's Xbox sales, according to Media Create Co, a researcher following the video-game industry.
Nintendo sold 1.19 million of its GameCube consoles at home.
Were it to buy Sega, Microsoft would gain a slate of sports games that compete directly against Electronic Arts.
"It seems to me that Microsoft would get more bang for the buck," said Stewart Halpern, an analyst who follows the video game industry for RBC Capital Markets. "It may be a better fit for Microsoft because Sega has all of the sports titles that would be duplicative for Electronic Arts."
Electronic Arts, whose American football game Madden NFL 2003 outpaced Sega's competing title NFL 2K3, doesn't have a popular character-based franchise on the order of Nintendo's Mario series and Eidos Plc's Lara Croft games, Halpern said.
"Electronic Arts really doesn't have its own character," he said.
Dissent within Sega has grown since its plan to merge with Sammy was announced earlier this month, some investors and analysts have speculated.
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