UPDATE 2-Square Enix pulls Tecmo bid, in talks with others

Fri Sep 5, 2008 5:10am EDT

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By Kiyoshi Takenaka

TOKYO, Sept 5 (Reuters) - Japanese video game maker Square Enix (9684.T) on Friday withdrew a proposal to bid for smaller rival Tecmo 9650.T after the offer was rejected, but said it is in alliance talks with other firms at home and abroad.

Square Enix, known for the "Dragon Quest" and "Final Fantasy" role-playing games, had offered to pay up to $206 million to acquire Tecmo, but Tecmo on Thursday said it would instead pursue a merger with fellow developer Koei Co 9654.T.

Ballooning development and marketing costs have led to 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) to create Activision Blizzard (ATVI.O).

"We are talking with quite a few companies in and outside of Japan. We are routinely in such talks," Square Enix President Yoichi Wada told reporters.

Asked if the company would pursue Tecmo again, Wada said: "I really don't know," but added that the key question was whether game creators at Tecmo wanted to work for Square Enix.

"If they truly dislike Square Enix, there is no point. All creators would leave the firm the moment the deal was done. It would be the equivalent of buying a building," Wada said.

Analysts have said the proposed acquisition would have helped Square Enix boost its global competitiveness as its strengths lie in role-playing games, which are popular in Japan, while Tecmo makes action games that sell well overseas.

Tecmo makes the fighting game "Dead or Alive 4" and action title "Ninja Gaiden II" for Microsoft Corp's (MSFT.O) Xbox 360 console.

The combination of Tecmo and Koei would create a company with around 40 billion yen ($375 million) in annual sales, less than one-third the size of Square Enix.

Shares in Square Enix, itself a product of a 2003 merger, closed down 0.3 percent at 3,540 yen. Tecmo fell 7.3 percent to 869 yen, but it is still 23 percent higher than it was on Aug. 28, the day before Square Enix made its proposal. (Additional Reporting by Sachi Izumi; Editing by Edwina Gibbs)

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