(Adds company comments, details)
By Sachi Izumi
TOKYO, Sept 4 (Reuters) - Japanese video game developer Tecmo Ltd 9650.T on Thursday rejected a takeover bid by Square Enix (9684.T) and said it would instead merge with rival Koei Co 9654.T amid a wave of consolidation in the industry.
Fierce competition has triggered a series of alliances in the global game industry, including the recent merger of U.S.-based Activision and the game unit of France's Vivendi (VIV.PA) that created Activision Blizzard (ATVI.O).
Tecmo, the maker of the fighting game "Dead or Alive" and action title "Ninja Gaiden", said it had decided to rebuff Square Enix's offer because merging with Koiei would give it a greater chance of boosting corporate value.
"Through a merger, we expect we can grow further by respecting both companies' identities and having an environment in which employees can fully exhibit their skills," Tecmo and Koei said in a statement.
Square Enix, known for the "Dragon Quest and "Final Fantasy" role-playing games, had offered to pay up to $206 million to acquire Tecmo. It had said it would only do the deal on friendly terms and set Thursday as the deadline for Tecmo's answer.
Square Enix spokeswoman Misa Tominaga said the company would decide on its next step after seeking the rationale for Tecmo's rejection, details of the Tecmo-Koei merger plan, and reasons why it is considered better than Square Enix's proposal.
Shares of Tecmo jumped 7.5 percent to 937 yen after the Nikkei business daily reported the planned merger during market hours while those of Koei rose 0.3 percent to 1,552 yen before the Tokyo Stock Exchange halted trade in both shares.
Square Enix, which was aiming to broaden its product line-up and gain economies of scale through the Tecmo acquisition, slumped 1.9 percent to 3,550 yen.
Koei President Kenji Matsubara told a briefing that the companies intend to come up with a concrete merger plan within two months or so.
The combination of Tecmo and Koei would create a company with more than 40 billion yen in annual sales, but would still be less than a third the size of Square Enix.
Tecmo President Yasuharu Kakihara said the company would not consider another bid by Square Enix.
"Considering synergies, I thought Square Enix would bring more of that," said Mizuho Investors Securities analyst Etsuko Tamura, adding it was still unclear why Tecmo chose Koei, the maker of games like "Nobunaga's Ambition". (Additional reporting by Nathan Layne, Yumiko Nishitani, and Noriyuki Hirata; Editing by Chris Gallagher)