Midway and Eidos considering a merger?

RUMOR CONTROL: Source: A report on trade site Next-Gen citing an unnamed source.

What we heard: Eidos parent company SCi Entertainment has been the subject of numerous rumors ever since the publisher announced in September that it was in "extremely preliminary" talks with a potential acquirer. The Guardian was quick to report that the potential purchaser of SCi was Ubisoft, a charge the publisher denied.

That was followed by a report from The Times that said media conglomerate Time Warner and an unnamed Chinese company were also interested in the Tomb Raider and Hitman publisher. That article even suggested that Electronic Arts could be interested in the London-based SCi, as EA had previously pledged to invest in the British gaming industry.

Next-Gen cites a source with "a major game publisher" as saying SCi and Midway are "evaluating the possibility of a merger," and states that the two parties had actually entered preliminary merger talks once before in 2003, two years before SCi acquired Eidos. The exceedingly vague attribution on the source is likely just to further conceal which end of the supposed deal this information is coming from, but leaves open the possibility that it isn't an SCi or Midway employee at all. On top of that, if the source's claim is accurate, the two sides are merely sizing up the idea, not exactly etching a deal in stone.

The Next-Gen report refers repeatedly to the supposed deal as a merger rather than a buyout, which would make sense, as both Midway and SCi have faced financial difficulties of late and neither seems in a position to buyout competition. SCi stock has been trending downward since last June, and lost more than half of its value in the past three months. Likewise, Midway has faced difficulties with delays and disappointing revenues, resulting in a loss of half of its share value in the past four months.

Either company could be an attractive target at this point if other publishers feel the market has actually undervalued their shares, but any merger or acquisition could be complicated by a web of interests at the shareholder level. Midway's controlling stockholder is Sumner Redstone, executive chairman and founder of media conglomerate Viacom. Redstone's daughter, Shari, is the chair of Midway's board of directors and serves as vice-chair on the Viacom board.

Viacom is a direct competitor of Time Warner, which in addition to being a possible SCi suitor already owns a 10 percent stake of the publisher. Both Viacom and Time Warner operate television networks and movie studios, and both have gaming divisions flush with cash. Viacom is pouring $500 million into MTV Games in the coming years, while Time Warner's Warner Bros. Interactive Entertainment unit received the same amount of investment for development and acquisitions (like last November's $100 million pickup of Lego Star Wars developer Traveller's Tales).

While Midway and SCi are not in the best fiscal shape, the gaming groups of both Time Warner and Viacom are doing quite well, and would seem in a better position to swoop in and pick up either one of the publishers. Both Time Warner and Viacom are establishing footholds in the market, and Midway and SCi both offer an array of brands and experience relevant to the traditional gaming market.

The official story: "Midway does not comment on rumors."--A Midway representative. "I'm afraid we can't comment on rumours."--An Eidos representative.

Bogus or not bogus?: Not bogus that a merger could happen in the wake of the big Activision-Vivendi deal. Bogus that it's any more a done deal than previous SCi-Eidos acquisition rumors.