TOKYO--Motivated by a shrinking consumer base, higher development costs, lower-trending prices, and increasingly demanding development costs, toy giant Bandai and game publisher Namco today announced they would join operations. The alliance will become official on September 29, 2005, when the two companies will join operations and form a holding company to be known as Namco Bandai Holdings Inc.

In addition to leveraging their core strengths--Bandai's knack to create appealing and profitable characters and Namco's proven game development capabilities--the two hope to increase their competitiveness and relevance to a new generation of entertainment consumers.

The Associated Press is reporting that analysts speculate the new company will focus efforts on exploiting the increasing proliferation of broadband connection and creating applications targeted toward mobile phone users.

The new holding company, in which Bandai will hold a 57 percent stake to Namco's 43 percent, will make it the second-largest Japanese game and toy business company behind Sega Sammy Holdings. The combined annual revenue of the new company is estimated to be some 458 billion yen ($4.34 billion) for the full fiscal year ending March 31, 2005.

Terms of the merger will see Bandai swap one of its shares for 1.5 shares of Namco Bandai Holdings, while Namco will swap an even one-for-one share of its stock for a share in the new holding company.

Bandai president Takeo Takasu will become the president and representative director of Namco Bandai Holdings, while Namco vice chairman Kyushiro Takagi will become chairman and director.

"In the entertainment industry worldwide, global competition has intensified as technological innovations spur the expansion and widespread penetration of information technology networks. In addition, in the domestic Japanese market, the number of children has been decreasing due to declining birth rates, and people's hobbies and interests have diversified. In order to continue to secure sustained profits, we believe we must win customers by aggressively promoting research and development and creating and providing attractive products and services," the companies said in a joint statement.

"The [new enterprise] will integrate and mutually complement Bandai's strengths in character merchandising and Namco's strengths in game content--as well as its game development capability and its vast network of amusement facilities--with the goal of developing synergies in the entertainment industry. In the medium and long term, we aim to establish a new business model to enable us to succeed amidst global competition."

Bandai is Japan's leading and most profitable toy maker, best known for its Tamagotchi virtual pet. Bandai is also known for its anime characters, including the classic Gundam mech series (which the company markets toward older consumers). Bandai also has a game division, but that group is dwarfed by its toy operations.

It is common knowledge that both Bandai and Namco have contemplated a merger with Sega, but now, the new force will become Sega's biggest competitor. In 1997 Bandai and Sega announced their intention to merge into a single company, Sega Bandai, but Bandai broke off the negotiations when its Tamagotchi toy became a huge hit in both Japan and across the globe.

Then, in 2003, Namco proposed a merger with Sega. Ultimately, those overtures prompted negotiations, which led to discussions and the eventual merger between Sega and Sammy.

In other news today, the companies said Bandai acquired 7 million shares of Namco, tendering 10.5 billion yen ($996 million) in the transaction. That accounts for a 6.3 percent stake in the company.

Bandai shares fell 2.5 percent to 2,335 yen ($22.16) on the Nikkei exchange today, while Namco shares were up 8.9 percent to 1,531 yen ($14.53).