TOKYO (Reuters) - Hitachi Ltd (6501.T) and Mitsubishi Heavy Industries (7011.T) are ready to walk away from merger talks, sources with knowledge of the matter said on Friday, dashing hopes for a groundbreaking marriage of two of Japan's oldest conglomerates.
The suspension of talks comes after news first surfaced on Thursday that the two companies, which can trace their histories back more than 100 years, were discussing a limited combination of some businesses such as next-generation power operations and smart grids, with an eye toward a complete merger later on.
Three sources told Reuters on Friday that talks had stalled because Hitachi is keen to pursue a full merger while Mitsubishi Heavy prefers combining selected operations.
A Mitsubishi Heavy spokesman said on Friday it had nothing new to say other than it had no plan to agree to a merger. Hitachi officials were unavailable for comment.
Shares of both companies fell on Friday as investors learned of the looming failure of the talks. Shares of Hitachi fell 4 percent in early trading while Mitsubishi shares fell 4.7 percent.
"Both Hitachi and Mitsubishi Heavy have a long history and it means their corporate cultures are very different and that makes an merger tough," said Mitsuhige Akino, chief investment manager at Ichiyoshi Investment Management.
"They should aim for a full-blown merger and if they did, that would act as a catalyst for other Japanese firms," he added.
A merger would create a $150 billion revenue infrastructure firm second only to General Electric (GE.N) and could provide the impetus for cost cuts, which are essential if the two companies are to cope with a strong yen and fierce global competition.
According to Thomson Reuters data, a takeover of Mitsubishi Heavy, including its debt, could cost Hitachi around $28 billion, topping Softbank's (9984.T) $17.5 billion purchase of the Japanese unit of Vodafone Group (VOD.L) in 2004.
"We think Hitachi's interest in a merger may have been prompted by concern over the poorer competitiveness of its core social infrastructure business," Deutsche Securities analyst, Takeo Miyamoto, said in a report.
Hitachi, a sprawling conglomerate with 900 group companies that make everything from rice cookers to nuclear reactors, forecasts annual sales this business year of 9.5 trillion yen ($120 billion). It employs 360,000 people.
Mitsubishi Heavy is Japan's leading aircraft builder, defense contractor, a major shipbuilder and the lead systems integrator for Japan's space programme. A major partner of Boeing Co (BA.N), it has annual sales of about 3 trillion yen with 69,000 workers worldwide.
Both companies have struggled for years to make a profit. Hitachi made its first net profit in five years in the year ended March. Over the past decade it has lost an accumulated $14.3 billion compared to a net profit of $160 billion in the same period at General Electric. Mitsubishi Heavy, the nation's leading heavy machinery maker, remains saddled by losses in its jet and shipbuilding units.
A key area in the discussions on infrastructure-related operations between the pair is nuclear power plants.
A combination would give Hitachi, which makes boiling-water reactors, access to Mitsubishi Heavy's pressurized-water reactor technology, which has become the technology of choice for countries around the world.
But for Mitsubishi Heavy, the advantage would be solely in the scale afforded by a combination, which could help it weather an industry downturn as nations around the world demand more stringent safety requirements in the wake of the Fukushima nuclear power plant crisis.
Hitachi will close next week for Japan's traditional Obon summer break with Mitsubishi closing the following week, said JP Morgan analyst Yoshiharu Izumi. "It gives them time to cool off. A general merger is still a possibility," he said.
(Reporting by Taro Fuse, Taiga Uranaka, Kentaro Hamada and Tim Kelly; Editing by Will Waterman and Matt Driskill)