Pulse: Whether On or Off, Nintendo-Sega Gamemaker Deal Makes Sense

Both deny that they're even dating, but a marriage between rival gamemakers Nintendo and Sega would be a good match -- for them and for the software makers who write for them.

A New York Times story this morning quoted unnamed executives saying the two Japanese companies are negotiating a $2 billion purchase of Sega, maker of the Dreamcast game console. Both companies issued strong denials. But that doesn't mean the deal wouldn't make good sense.

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"Is it reasonable? Yes," said gaming analyst Edward Williams of Gerard Klauer Mattison. Nintendo would be the best bet to take over Sega, he said; "There is more synergy there than meets the eye."

Sega, which announced in October that it expects to lose $204 million for the fiscal year ending in March. Most analysts rank Sega's console as a perennial distant fourth behind Sony (SNE), Nintendo and Microsoft's (MSFT), which will enter the game console market this year with the Xbox. Nintendo will unveil its new Gamecube console at about the same time. Sony introduced its much anticipated PlayStation 2, then disappointed by failing to produce enough of them.

According to a UBS Warburg note today on gaming software sales for the week ending Dec. 16, Sega had just 8% of the market. Sony and Nintendo products each accounted for more than 40% of the software sold. According to The Times, Sega's $357 million loss for the year was expected to widen at the end of the fiscal year in March.

Nintendo has about $5 billion in cash, Williams said, more than enough for the purchase and for the marketing money for a big push of a new console. The two companies also have similar interests in arcade games. Best of all, Williams said, their software productions would mesh very well.

Nintendo's capture of the younger market with such titles as Pokemon would be a good fit with Sega's titles, which are aimed at an older market.

"Nintendo does well with children. Sega does well with the kid in all of us," Williams said.

A combined Nintendo and Sega would be a broader threat to its rivals, Williams said. And it would give a boost to the big independent software publishers whose games are crucial to a console's success. Electronic Arts (ERTS), the largest independent game producer, does not even make games for the Sega Dreamcast.

The Tokyo Stock Exchange suspended trading of Sega shortly before the close last night, pending a clarification of the report.

Three strong hardware players would compete for the research and development share, and the time of the better-known game developers, Williams said. (Williams maintains a buy rating on EA. His company has no underwriting relationship with the company.)

Electronic Arts was up today $1.88, or 4.4%, to $44.38. Second-ranked Activision (ATVI) was up 0.4%, and third-largest software publisher THQ (THQI) closed up 7.6%.

The market also reacted well to an acquisition that did go through. Handspring (HAND), which makes the handheld VisorPhone, finished up today after announcing that it had acquired Bluelark Systems, which makes a browser especially for handheld devices.

A note from SG Cowen repeated a buy rating on Handspring, saying the melding of the company's products with the software is "accelerating the convergence of communications over handheld devices."

Handspring finished up $5.81, or 16.2%, to $41.69. Rival Palm (PALM) closed down 3.8%, and competitor Research In Motion (RIMM) was down 2% at the close.

3:14 p.m.: Semiconductors a Bit Chipper

It seems only fair that after weeks of doubt and negative sentiment, a little bit of positive speculation should touch semiconductors.

What's happening? Analysts have forecast that the so-called inventory correction hurting chip companies is really just the beginning of a much longer cyclical downturn. Now there's some talk going around that the inventory correction that affected the communication chip companies might be worked off sooner than expected. "If that's the case, then I'm jumping for joy," said Peter Andrews, a semiconductor analyst at A.G. Andrews. But, he said, rumors have been flying around the sector without much meat behind them.

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Most analysts had expected it would take one or two quarters before inventories got whittled down enough that companies that use communications chips, like networking companies and companies that provide high speed Internet access, would need to place new orders.

In a research note today, Rick Whittington of Banc of America Securities quoted industry sources who said some chip companies had seen a jump in orders from communications companies during the month.

Where rumors fly, stock trades often follow.

Communication chipmaker Applied Micro Circuits (AMCC) was trading sharply higher, up $7, or 10.7%, to $72.56. Fellow communication chipmaker PMC-Sierra (PMCS) was also up 9%.

The chip companies most likely to see an incerase in orders would be those that have kept their inventories at a reasonable level and are selling the newest communication technology, said Alvin Kressler, semiconductor analyst with Kaufman Brothers. Those include Applied Micro Circuits and PMC-Sierra.

The Philadelphia Stock Exchange Semiconductor Index, which tracks the broad chip sector, was trading 5% higher for the day, after falling 1.4% yesterday.

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