View Full Version : Microsoft cancels a video game deal--tried to buy Sega/Square

Ayanami III
07-17-2002, 12:39 PM
The company tried to invest cash in Sega so that the Japanese video game publisher could rival game publisher Square.
By Dean Takahashi
July 16, 2002

Microsoft hasn't bought any game publishers to bolster the fortunes of its Xbox video game console, but not through lack of trying.

This spring the Redmond, Washington, software giant almost struck a deal with Sega Enterprises to buy a controlling stake in the Japanese game publisher. But the deal turned out to be too complicated to pull off before the industry's big trade show, the Electronic Entertainment Expo, which took place in May. The failed deal shows Microsoft's dilemmas as it deals with the expected losses related to the Xbox. According to sources familiar with the matter, Microsoft planned to buy a controlling interest in Sega, which would in turn use the cash to acquire Japanese rival Square. Based on Sega's current market capitalization, a controlling stake in the company would have cost Microsoft more than $1.8 billion.

Sega is still recovering from the losses and debt it accumulated during its quest to launch the Dreamcast video game console that it discontinued last year. Nevertheless, the company has predicted that it will post an operating profit of 18 billion yen, or $141.4 million, in the current fiscal year (ends March 2003).

Even so, it's easy to see why Microsoft's and Sega's interests didn't align. The Wall Street Journal reported last week that Sega's chief operating officer, Tetsu Kayama, said that Sega was interested in expanding its U.S. and European game development efforts through acquisitions. Charles Bellfield, a vice president at Sega of America Dreamcast, declined to comment on the failed deal, but he noted that Sega's recent actions have been designed to position the company as an independent game publisher. Sega's parent company, CSK, has indicated that it plans to divest itself of its 14 percent ownership of Sega stock. Microsoft and Square officials declined to comment.

Mr. Bellfield would not name any of the companies that Sega was negotiating with. Square is attractive because it has the strongest role-playing game franchises, including the Final Fantasy games that sell millions worldwide. Microsoft itself tried to buy Square in 1999, but its then-CEO, Hisashi Suzuki, asked for $2.5 billion for 40 percent of the company, a price that exceeded the entire market capitalization of Square at the time. Then Square's Final Fantasy movie bombed, and Sony bought 19 percent of Square for a mere $125 million last year.

Sega has about $414 million in cash, not enough to pull off major acquisitions. Its stock price has been trading near 52-week highs of 3300 yen, or $28.44. Microsoft, on the other hand, has an estimated $42 billion in cash and wants to ensure that its Xbox succeeds. Ed Fries, vice president of game publishing at Microsoft, has long argued that the company should grow its video game business organically, either through internal game production or by acquiring smaller game development shops rather than going after large game publishers. The Xbox has sold 4 million units worldwide, but it lags behind Sony's PlayStation 2, which has sold 30 million units.

Before Microsoft launched the console, others at Microsoft argued that the company should buy a large game publisher. Microsoft chairman Bill Gates held talks with Sega executives in late 1999 and early 2000, but they couldn't reach a deal at the time because Sega wanted to keep investing in the Dreamcast.

Now Sega no longer has the encumbrance of a money-losing hardware division. It is in the midst of expanding its game production to make games for the PlayStation 2, Nintendo's GameCube and Game Boy Advance, and the Xbox.

It isn't entirely clear why the latest deal failed. One likely problem was that Microsoft wanted to get Square to convert from making games for all of the consoles to focusing exclusively on games for the Xbox, a move that would have cost Square too much in lost PlayStation 2 and GameCube revenue.

Write to Dean Takahashi.

07-17-2002, 12:48 PM
I think a big move will happen sometime soon between these companies. But that would be sweet if Microsoft acquired sega and square. At least microsoft didn't buy 40% of square for 2.5B when a year later they sold 19% for 121 million.