Sammy, Japan's biggest maker of gambling machines, said yesterday it would take control of computer games developer Sega, best known for Sonic the Hedgehog, in a deal worth 165bn yen (£800m).
By combining Sammy's slot machine and pachinko (gambling machine) concerns with Sega's software expertise, the holding company's combined annual sales will exceed ¥440bn, overtaking rival Konami.
"We still lack killer contents, and Sega's history and library of software will help us a great deal," Sammy's chief executive, Hajime Satomi, told reporters.
Sega has suffered recently from intense competition in the computer games industry but yesterday showed it had turned the corner by announcing annual profits almost three times higher than the previous year's.
The takeover has reportedly caused concern among Sega employees, and analysts have speculated that Mr Satomi will try to make cost savings in research and development.
Sammy took a 22.4% stake in Sega at the end of last year and made its first takeover attempt. Although the bid failed, Sammy's holding led to Mr Satomi becoming chairman of Sega in February.
Yesterday Mr Satomi said the combined company could generate one trillion yen in revenues, though he did not say how long that would take.
The two firms said in a statement they planned to set up a new holding company, Sega Sammy Holdings, in October. Sammy shareholders will control 72% of the new company.
Yesterday Sega announced a group net profit of ¥8.76bn for 2003-04, compared with ¥3.05bn the year before. Revenues dropped 3% from a year ago to ¥191bn.
Sega attributed its latest annual figures to the success of its arcade games business. It estimated sales would rise 6.7% to ¥204bn this year but conceded the merger could result in lower profits for 2004-05.
Sammy, meanwhile, reported a 40% increase in annual net profit, thanks to a 52% rise in sales - a trend the company predicted would continue into the current business year.
Sega has concentrated on games software development since 2001 when it was forced to take its loss-making Dreamcast game console off the market amid competition from Sony and Nintendo. Sega has lost ¥191bn since 1998.
Sammy produces machines for pachinko, a vertical pinball-like game and a national obsession in Japan.
The deal is designed to help Sammy consolidate its foothold in the intensely competitive pachinko sector, one of few legal avenues for gaming in Japan, by incorporating Sega characters and technology into its machines, while branching out into the arcade games sector.
The initial merger talks last year broke down due to disagreements over management style, and terms and conditions.
Though titles such as OutRun 2 - a racing game - have brought Sega success in the arcade business, it has lost out in the crucial sports games genre to other software developers such as Electronic Arts, maker of the hugely popular NBA Live basketball title.
But Sega has been able to make up for its weaknesses by slashing promotional, development and other costs in its video game software division.
