By switching to a holding company format both companies will reduce management costs and be more competitive in the international marketplace. Right now there are no plans to blend key properties to make Dead or Alive Warriors or Ninja Gaiden Neo Romance, but if Namco Bandai can partner with Koei to make Dynasty Warriors Gundam anything is possible.

Koei and Tecmo, the maker of fighting game "Dead or Alive" and action title "Ninja Gaiden", said on Tuesday they plan to merge operations under a holding company in April.

Each Tecmo share will be exchanged for 0.9 shares in the holding company, while one share in the holding firm, called Tecmo Koei Holdings, will be allotted to each Koei share, allowing Koei shareholders to take three quarters of the new entity.

Larger rival Square Enix Holdings Co Ltd (9684.T) earlier this year offered to acquire Tecmo, but the company rejected the takeover bid and said it would instead merge with Koei, which offers history simulation game "Nobunaga's Ambition".

The holding firm aims for an operating profit of more than 16 billion yen in the year ending March 2012 on sales of more than 70 billion yen.

The targets compare with a combined operating profit between Tecmo and Koei of 8.5 billion yen and sales of 41.2 billion yen last business year, which ended March 31, 2008 for Koei and on Dec. 31, 2007 for Tecmo.

Ballooning development and marketing costs have prompted video game publishers to seek alliances this year, including the creation of Activision Blizzard (ATVI.O) through the merger of U.S.-based Activision and the game unit of France's Vivendi (VIV.PA).

Take-Two Interactive Software Inc (TTWO.O) had until recently been an acquisition target of bigger rival Electronic Arts (ERTS.O), but the maker of the popular "Grand Theft Auto" series said last month it planned to remain an independent company.

Ahead of the announcement, shares in Tecmo closed up 3.9 percent at 875 yen, while Koei gained 1.1 percent to 939 yen. The benchmark Nikkei average .N225 fell 2.3 percent.