Sept. 16 (Bloomberg) -- Konami Corp., Japan's fourth-largest maker of video games, and Capcom Co., the sixth biggest, may be next in line as game companies look for mergers to help raise earnings amid rising costs, analysts say.

In the past 18 months, four mergers have been announced in the industry totaling $4.47 billion, according to Bloomberg data. Bandai Co. in May agreed to buy Namco Ltd., while Square Enix Co. last month bid for Taito Corp. The companies are showcasing their latest software at today's Tokyo Game Show.

``Rising costs and falling profit margins will speed up consolidation in the industry,'' said Michihiro Ishizuka, Konami's executive officer in charge of game software business in Tokyo. ``Buying companies with know-how and infrastructure for online businesses would make a lot of sense for us.''

Japanese software makers are seeking partners in the $21 billion global video game market to share rising development costs for new consoles from Sony Corp. and Microsoft Corp. Microsoft's Xbox 360 and Sony's PlayStation 3 consoles will offer higher- definition images and faster speeds.

``Companies like Taito, Bandai and Namco are not merging because they are facing financial ruin,'' said Takashi Oya, an analyst with Deutsche Securities Co. in Tokyo. ``They are looking three years down the road and thinking this is the right strategic choice.''

Namco's stock has soared 29 percent since the announcement, while Bandai has gained 14 percent. Shares of Taito gained 12 percent while Square Enix rose 6.5 percent after its bid.

Sales in the global gaming industry, including revenue from online games, personal computers, portable devices, and software, may be worth 2.3 trillion yen ($21 billion) this year from 2.1 trillion yen a year ago, according to Tokyo-based market researcher Enterbrain Inc.

`Attack Mode'

Tokyo-based Konami, whose game software business accounted for more than 50 percent of its operating profit last year, bought Hudson Soft Co., a Japanese maker of online and video games and mobile content such as ring tones, in April. It also took a stake in toymaker Takara Co., game software designer Genki Co., and People Co., Japan's largest operator of fitness centers.

Konami is trying to break its reliance on the video games business, where earnings depend on hit titles, and find new revenue sources by expanding into toys, sports clubs, arcade machinery and casino businesses.

The company's Yu-Gi-Oh! Characters are used in playing cards, table and video games, while its ``Winning Eleven'' soccer game, offered on household consoles and arcade machines, will be available on mobile phones in December.

``Konami, which took a break after three years of aggressive expansion, is now back into attack mode, possibly reviving their acquisition plans,'' said Yuuta Sakurai, an analyst at Nomura Research Institute Ltd. in Tokyo. ``Consolidation is gaining pace and music, movie, broadcasting companies, and Internet portals are possible partners.''

In the past 15 years, seven of the top 10 Japanese game makers were either created through acquisitions or through mergers, according to Bloomberg data.

Target

Capcom, Japan's sixth-largest game software maker, may be a target for a takeover, according to analyst Hiromu Takada.

The Osaka-based company said last month its game business will report a loss in the current quarter because there won't be any major new titles released in the period. Capcom's market capitalization is 66.15 billion yen, 17 times smaller than its nearest rival Sega Sammy Holdings Inc.

``Capcom is probably the most likely candidate for acquisition or merger out of the remaining large companies. The company is in a difficult situation financially,'' said Takada, an analyst at Cosmo Securities Co. in Tokyo. ``The most effective of possible combinations for Capcom would be if Sega Sammy bought the company.''

Capcom has not been involved in any merger or acquisition in its 20-year history, according to spokesman Ryosuke Tanaka.

Tokyo-based Sega Sammy was created last October, when pachinko slot machine maker Sammy Corp. bought Sega Corp., maker of the ``Sonic the Hedgehog'' video-game character. Sega Sammy's game business reported a 2.05 billion yen loss in the three months ended June 30, the company said last month.

To contact the reporter on this story:
Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net.