Hitachi Ltd., Japan's biggest industrial electronics firm and Mitsubishi Heavy Industries Ltd , the nation's leading heavy machinery maker, may merge to create one of the world's largest infrastructure firms with more than $150 billion in combined sales, two sources said on Thursday.
A murky global outlook for nuclear power -- both companies build reactors -- in the wake of Japan's nuclear crisis and profit-sapping yen strength have spurred talks aimed at a merger that would combine their infrastructure and other core businesses in a new company in 2013, said the Nikkei business daily, which first reported the news.
Hitachi and Mitsubishi Heavy said in separate statements that no agreement had been reached on a merger. But Hitachi President Hiroaki Nakanishi was quoted as saying they would begin negotiating a deal and the company's CEO said an announcement would be made later on Thursday.
A deal would mark a significant shift in the Japanese business landscape, which has been dominated by large, sprawling conglomerates with close ties to peers across a range of different industries.
"It's going to be a history-changing event if true," said Fujio Ando, senior managing director at Chibagin Asset Management.
"It would really be praiseworthy if they can really move this forward because the merger means they will be creating a new company with companies from different ex-zaibatsu or business groups. This used to be seen as extremely difficult."
A merger would be one of the largest ever in Japan. Hitachi, with a market value of $27 billion, would likely be the acquirer of Mitsubishi Heavy, valued at nearly $16 billion as of Wednesday's closing price.
With talks at an early stage, uncertainty remains as to whether the two companies can achieve a final agreement, the sources, who were familiar with the matter, said.
Shares in both companies rose, with Hitachi, the likely dominant partner in any tie-up, rising 3 percent, and Mitsubishi Heavy jumping 4.6 percent.
"We think this could mean the continuation, acceleration of Hitachi's exit from non-core businesses and measures to leverage group company profitability," Goldman Sachs analyst Ikuo Matsuhashi said in a report on the media reports, describing any merger decision as "a surprise."
YEN UP, ECONOMY DOWN
As the yen gains to record levels, more Japanese companies are mulling ways to revamp operations, including mergers with rivals, in a bid to lower costs and stay competitive, say analysts. A weak global economic outlook is adding to the urgency to act.
Traditionally seen as a last resort of failing companies, Japanese corporations until recently have largely eschewed strategic mergers. A combination of two of Japan's oldest, most established conglomerates would mark a deeper embrace of mergers as a tool for corporations to squeeze costs and gain competitive scale and could spark a flurry of other deals in Japan.
Hitachi makes products ranging from rice cookers, televisions to excavators, lawn mowers and computer chips and projects annual sales this business year of 9.5 trillion yen. The company, which employs 360,000 people, said on Wednesday it would halt production of television panels.
Mitsubishi Heavy is Japan's leading aircraft builder, defense contractor, a major shipbuilder and the lead system integrator for Japan's space program. A major partner of Boeing Co it racks up sales of annual sales of about 3 trillion yen with 69,000 workers worldwide.
By combining their reactor businesses, the two firms would be better positioned to weather an industry downturn as nations around the world shun nuclear energy following the Fukushima nuclear power plant crisis.
Hitachi makes boiling-water reactors while Mitsubishi produces pressurized-water reactors. This would allow them to meet the needs of different countries seeking nuclear power plants, the Nikkei said.
"We just have to swallow the strong yen, and figure out how to absorb this within a set time period," Hitachi Construction senior managing director Hiroshi Tokushige said when the Hitachi subsidiary released its quarterly earnings on July 27
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