Hoping to Get Out of Slump, Sega Goes for a ‘Power’ Play

Power Rangers, meet Sonic the Hedgehog.

In an apparent effort to pull itself out of the doldrums, Japanese video-game giant Sega Enterprises, the developer of the once-hip Hedgehog video game character, announced Thursday that it is paying $1.09 billion for Bandai Co., the Japanese toy giant that makes the Power Rangers dolls.

The two companies said the newly created company, Sega Bandai, will become “the global leader in interactive entertainment,” with $5.6 billion in combined sales and an expertise in video games, character development and merchandising.

But Japanese companies seldom merge unless one of the companies is in trouble. And in this case, both partners are facing serious problems.

Sega, which came close to unseating Nintendo in 1993 as video game king with its Genesis game machine, stumbled when it confused customers by coming out with two incompatible, poorly performing CD ROM-based game machines. New, better machines from rivals Sony and Nintendo have since sharply cut into Sega’s video game business.

Last month, Sega admitted it would earn only $44.5 million for the year ending March 31. That’s half its original projection and one-twentieth of what it was making four years ago when its zippy Hedgehog was running circles around Nintendo’s Mario games.

Bandai, for its part, stumbled when it took a major gamble on a multimedia set-top box, based on a modified version of Apple Computer’s Macintosh software, to run games and browse the Web. Bandai was among the first companies granted a license to sell Apple technology under its own name.

But Bandai’s “Pippin Atmark,” released amid much fanfare last fall, has been a bomb. Bandai also has been hurt by sluggish sales of its Power Rangers figurines.

Earlier this month, Bandai announced it would lose $16.81 million for the year ending March 31. It had earlier predicted a profit of $184.87 million.

The merger may offer some chances for synergies. Bandai could sell toys based on characters developed for Sega game software. In the Japanese market, Sega’s game machines continue to sell relatively well. Bandai’s marketing could help sell Sega software. But analysts doubt the merger will do much to halt Sega’s precipitous loss of worldwide market share in video game consoles.

“I still wouldn’t be surprised to see them exit the [video-game] hardware business altogether,” said Andrea Williams, analyst at Volpe Welty & Co. in San Francisco. “They’ve been losing a lot of money.”

Sega has been gradually redefining itself as a software company--spending more money, for example, developing software for personal computers.

Under the agreement, which will be completed in October, Bandai shareholders will receive 0.76 share of Sega Bandai stock for each share held in Bandai.