Japan's Konica Corp. and Minolta Co., two film photography giants struggling for a foothold in the digital era, said today they had agreed on a merger that could propel them into the big league. Konica, the world's third-largest photo film maker, and Minolta, a leading maker of SLR cameras struggling after poor financial results, already have a mutual supply deal in photocopier machines and a toner joint venture.

Japan's Konica, Minolta Agree on Merger

TOKYO (Reuters) - Japan's Konica Corp. and Minolta Co., two film photography giants struggling for a foothold in the digital era, said on Tuesday they had agreed on a merger that could propel them into the big league of office machine makers.

Konica, the world's third-largest photo film maker, and Minolta, a leading maker of single-lens reflex cameras hobbled of late by a weak balance sheet, already have a mutual supply deal in photocopier machines and a toner joint venture.

Both are focusing increasingly on office machines, which already account for the bulk of Minolta's revenues and even at Konica generate more sales than photo film does.

The stock market took a cautious stance on the merger prospects, bidding up the two companies' shares in the morning after media reports they would form a joint holding company to oversee their operations, but later pushing them lower again.

While company spokesmen acknowledged that merger talks were under way, the announcement of a basic agreement on a merger came after the close of share trade.

The companies later said in a statement they would form a holding company known as Konica Minolta Holdings Inc. in August through a share swap, with Konica shares the surviving entity.

The share swap ratio will be decided on January 16.

The two would have combined revenues surpassing one trillion yen ($8.4 billion) a year -- still barely one-third those of Canon Inc, Japan's biggest office equipment maker, and two-thirds those of number-two Ricoh Co

The holding company will aim for combined revenues of 1.3 trillion yen and an operating profit of 150 billion yen by the year ending in March 2006, with the merger expected to provide 50 billion yen in synergy effects.

The two firms also said they would cut their combined workforce by 4,000 by 2005 from 38,500 now.

Limited Opportunities

Minolta's shares rose as much as nine percent in the morning but ended with a more modest gain of 1.52 percent, at 536 yen.

Konica jumped four percent in the morning to a seven-month high of 905 yen but closed 0.8 percent lower at 864 yen, in line with the benchmark Nikkei average's 0.65 percent drop.

Some analysts noted worries that Konica, whose market capitalization is double Minolta's, would be weighed down by the camera maker's battered balance sheet.

Others pointed to recent reforms and job cuts at Minolta that shored up its finances, but questions remained about possible benefits from a merger in the key office equipment division.

"There are probably some synergies... but not as neatly as it might sound," said Merrill Lynch analyst Richard Kaye.

He noted that Konica's high-speed copiers served a different customer base to Minolta's mid- and low-range machines, limiting opportunities for savings on maintenance and service operations, for example.

While the companies have roughly equal annual revenues around 500 billion yen a year, their market value has diverged sharply in recent years as Minolta struggled with hefty losses and an out-of-focus product strategy.

Reformed and ready

"Of course there is concern about a greater burden on Konica. For Minolta, we could see this stock go to 700 yen," said Hideo Ueki, chief investment officer at UBS Asset Management.

He was upbeat about the overall implications of the merger.

"Industry consolidation will give more bargaining power to suppliers who survive it. In that context, this is positive."

Merrill's Kaye was less concerned that Minolta would become excess baggage for Konica.

"Minolta has successfully reformed its own balance sheet as of the first half of this fiscal year (April-March)," he said.

Indeed, Minolta's share price has surged more than two-thirds over the last four months, when better-than-expected cost savings allowed it to boost its profit targets even as revenues sagged.

Kaye warned, however, that Minolta's success in low-end color laser printers was under threat from new products from Canon Inc. and Hewlett-Packard Co., the industry leaders in laser printers.

The office equipment and digital camera businesses have been two of the brightest spots for Japan's struggling high-tech manufacturers, with both Canon and Ricoh posting record profits.

But neither Minolta nor Konica has been able to leverage their strong brands in film photography in the fast-growing but hotly competitive digital camera market, dominated by the likes of Canon, Sony Corp. and Olympus Optical Co. Ltd.

Kaye saw little likelihood of the two taking a significant slice of the digital camera market, although Minolta has stepped up its presence over the past year.