Just came across the best assessment of this entire MEGATON thing..
this was posted on IGN boards by Gamecube
In recent weeks, there has been a flood of speculation that Nintendo might acquire one or more major Japanese game developers. I created this thread to provide some factual background on the current situation and some analysis of the rumors.
NINTENDO'S $6.5 BILLION
Market Capitalization: $14.6 billion (Share Price: $103.8)
Shares Outstanding: 141,656,000 (44% Held by Insiders)
2002 Sales: $4.48 billion, Employees: 3,070
Nintendo has long held a firm policy against pursuing success through major acquisitions. The company has instead focused on generating talent from within and investing in smaller game developers. This structure has allowed Nintendo to expand software development capacity with minimal financial risk. If Nintendo ultimately does not depart from this financial philosophy, there are a number of ways that the company could put its immense cash holdings of ¥800 billion ($6.5 billion) to work.
Nintendo recently spent $200 million repurchasing 2.2 million of its own shares, effectively canceling the $183 million gained from the sale of its 49% stake in Rare Ltd. to Microsoft. Nintendo has further set forth a buying program that will entail the repurchasing of a total of 14 million shares. Nintendo may continue to explore joint relationships with major third parties to develop sequels for established Nintendo brands. Nintendo’s partnerships with Sega and Namco to develop F-Zero GC and Star Fox Armada are two such examples. Nintendo may further invest in third parties by buying exclusive titles as they have with the Biohazard series and recently announced Capcom games. Nintendo may also seek out new second parties after recently striking gold with Retro Studios. Ultimately, this is where I see Nintendo focusing their finances.
If Nintendo does pursue the path of major acquisitions, there are a few potential targets that stand out. Before getting into a discussion of these companies however, it is important to note a long-standing philosophy of former Nintendo president, Hiroshi Yamauchi, which encouraged a cautious reservation in spending so that the company would never be forced to assume debt. This philosophy of self-reliance was reiterated by Satoru Iwata at a recent analyst’s conference when he explained, "This is a high-risk business. There may come a time when we would have to make intensive investments."
RUMORED ACQUISITION TARGETS
CAPCOM
Market Capitalization: $1 billion (Share Price: $17.2)
Shares Outstanding: 58,429,000 (31% Held by Insiders)
2002 Sales: $507 million, Employees: 1,270
Key Assets: Devil May Cry, Megaman, Onimusha, Resident Evil, Street Fighter
Supporting Merger Rumors:
Capcom’s top software assets include a number of mature titles that would be a great complement to Nintendo’s own software offerings. Capcom and Nintendo have long had very close business ties. In 2000, Nintendo entrusted development of The Legend of Zelda: Oracle of Ages and Oracle of Seasons for Game Boy Color to Capcom. In 2001, Nintendo and Capcom announced a deal making the entire Biohazard series exclusive to Nintendo GameCube. More recently, Capcom’s Production Studio 4 revealed four new games under development exclusively for GameCube including Dead Phoenix, Killer 7, P.N. 03, and Viewtiful Joe. Capcom’s stock is attractively priced at a 50% discount to its highs.
Discounting Merger Rumors:
If recent dealings between Nintendo and Capcom indicate anything, it’s that Nintendo has no intention of acquiring the developer/publisher. If Nintendo intended to acquire Capcom, there would be no reason for Nintendo to invest in the exclusivity of Production Studio 4 games for GameCube. Recent deals between Nintendo and Capcom likely demonstrate the totality of deals we’ll see between Nintendo and Capcom for some time to come. A recent cash buildup within Capcom for expansion of R&D operations would also appear counter-intuitive if a buyout was imminent.
NAMCO
Market Capitalization: $817 million (Share Price: $14.8)
Shares Outstanding: 55,087,500 (37% Held by Insiders)
2002 Sales: $1.23 billion, Employees: 4,000
Key Assets: Ridge Racer, Soul Calibur, Tekken, Time Crisis
Supporting Merger Rumors:
Namco is the smallest of the rumored acquisition targets and is currently trading at a 50% discount to the stock’s 52-week highs. With key assets including the Tekken, Ridge Racer, and Soul Calibur series, Namco’s top titles have significant appeal with teen and adult audiences and have system-selling potential. Nintendo has recently developed close business ties with Namco. The two companies have partnered on development of software for the Triforce arcade board and Nintendo GameCube.
Discounting Merger Rumors:
While Namco is a great software developer, many of their operations including film, restaurants, and amusement facilities are outside of what Nintendo would be interested in acquiring. This is not to mention that Namco is currently trading at book value primarily due to the inherent risks of these businesses. For a risk-adverse company like Nintendo, Namco would likely not be the first company on their acquisition list.
SEGA
Market Capitalization: $1.79 billion (Share Price: $10.3)
Shares Outstanding: 174,500,000 (48% Held by Insiders)
2002 Sales: $1.67 billion, Employees: 3,470
Key Assets: 2K Sports, JSR, PSO, Sega GT, Shenmue, Sonic, Virtua Fighter
Supporting Merger Rumors:
Sega has a fantastic portfolio of great talent and great franchises. The company has had a close working relationship with Nintendo, partnering on development of the Triforce arcade board and currently working on F-Zero AC and F-Zero GC for Nintendo. The combination of Nintendo and Sega would create a force to be reckoned with in the software development world and would place Nintendo in a much stronger position to compete with Sony and Microsoft in the home console arena. Sega’s stock price remains quite low and may be a true value if the full potential of the firm can be unlocked.
Discounting Merger Rumors:
While CSK has repurchased $183 million of its own stock from Sega, it has expressed no interest in selling its 22.8% stake in the firm at these depressed stock levels. Sega is also trading at a high P/E multiple of 43 and management is having difficulty keeping software operations in the black even with all three major consoles as a marketplace. The firm may ultimately be too large to operate profitably on a console with a limited installed base.
DEJA VU
In December of 2001, the New York Times reported that Nintendo and Sega were engaged in serious discussions regarding a potential $2 billion acquisition. At the time, significant debt loads were weighing on Sega’s stock and it was thought that both Microsoft and Nintendo would soon be engaged in a bidding war for the firm. The rumors were short lived however as then Nintendo president, Hiroshi Yamauchi, told reporters, "The information reported by some overseas media that our company will buy out Sega is all wrong, and we express with 100% certainty that our company will not buy out Sega." Sega officials also rebuked the rumors calling them “groundless†and a “fallacy.â€
For nearly a year, all had been quiet on the Eastern front until this November, when Sega announced it would sell back its $81.3 million stake in its parent company CSK. Japanese news service, Nihon Keizai Shimbun, reported that ties between two companies had faded since the passing of Sega Chairman and President Isao Okawa. Meanwhile, CSK stated it would retain its 22.8% stake in Sega largely because of the company’s depressed share price. This development led some to speculate that Sega might again be considered a serious acquisition target. On November 29, shares of Sega climbed to the exchange's daily limit of 200 yen, to close up 134 yen at 1,385 yen on rumors that Microsoft would buy out CSK’s position and acquire the firm. However, both companies firmly denied the rumors and Sega shares fell during the following trading session.
NO FINALITY
When dealing with publicly-traded companies such as Capcom, Namco, and Sega, it is the shareholders, not the company management, that own the company. In many respects, the relationship between shareholders and management is much like that between a principal and agent as shareholders control management through a board of directors. It is the job of management to act in the best interest of shareholders and thus the number one concern of management is to maximize shareholder value.
With these fundamental concepts in mind, the management of a company ultimately cannot, under shareholder opposition, reject a move that would have a positive impact on the company’s stock price in favor of one that would have a less positive impact. Such a scenario could occur if Nintendo was to make a $1.2 billion ($20.5/share) acquisition bid for Capcom and Microsoft was to follow with a $1.3 billion ($22.2/share) bid of its own. If taken to a shareholder vote, Nintendo’s bid would likely be voted down by shareholders as too low. So there exists no finality in one company merely making a bid for another. Thus, it would be difficult for V-Jump to know that an acquisition will take place.
MEGATON
In September, Japan's V-Jump magazine wrote of a pending "maga-ton" announcement that would be made by Nintendo near the end of the year that would be the “start of a super-big project that will cause a worldwide boom for the GameCube." Many people have speculated on a major third-party exclusive, an unbelievable online strategy, or the acquisition of a major third party. Two key terms in the statement are important to note: mega-ton, which indicates something on a truly massive scale, and worldwide, which clarifies the announcement will have a profound effect worldwide - not just in North America or Japan. This almost rules out a major exclusive title because few of these have mega-ton selling power around the world. The notion that the mega-ton announcement refers to a merger or acquisition is just as doubtful. If such an activity was in play, Nintendo wouldn’t share that information with the media in advance. Further, it would be much more likely for the news to be broken by a major investment institution or the companies themselves. V-Jump likely wouldn’t have such information in advance of the news, let alone three months in advance. It’s far more likely that advanced knowledge pertained to a Nintendo product instead.
While many gamers are still waiting for an announcement, some believe it’s already come and gone. The GameCube Game Boy Player, which Nintendo unveiled in late November, would seem to qualify in most respects as the megaton announcement. Nintendo may see the Game Boy Player as the way to create a new selling point for the Nintendo GameCube while boosting sales of Game Boy Advance software (In a revised earnings outlook released in October, Nintendo revealed GBA software sales for this year would come in 12% below expectations). Perhaps even more significant and relevant to GameCube sales, the Game Boy Player may serve to tie Nintendo's home console business to its handheld business, through which it maintains a near monopoly on the market. GBA's installed base expected to exceed 45 million by the end of 2003. If just a fraction of Game Boy Advance owners are motivated to purchase a GameCube as a result of the Game Boy Player, the impact on GCN sales could indeed be of “megaton†proportions.
