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Sega Goes Back to Level 1

Troubled game maker Sega is still very much in play after the company failed to reach agreement this week with Sammy Corp., analysts said Thursday.

The merger, proposed back in February, would have matched the maker of Sonic the Hedgehog video games with Japan's largest maker of pachinko machines and other games of chance.

The collapse of talks has revived speculation that Sega, which pioneered online gaming with its networked Dreamcast device, might find a new home elsewhere. Game makers Namco, Microsoft , and Sony are most often mentioned. All three compete for a piece of the lucrative gaming market estimated at over twenty billion globally.

Namco told internetnews.com it actually has an offer on the table, but the deal appears to be off.

"We made our first offer in mid-April," said Kenji Hisatsune, executive vice president and COO of Namco America in San Jose, Calif. "Last week we made another request with a deadline of Friday, May 9. Yesterday Sega said they would not be able to respond by then."

Of all the rumored deals, a Namco merger makes the most sense according to Michael Pachter, research analyst for Wedbush Morgan Securities in Los Angeles.

"Namco's games are aimed at a more mature audience, so the two would be complementary."

Pachter said a deal with Microsoft would also make sense.

"They [Microsoft] have not done a good job internally of developing games for the Xbox. Sega could provide unique and exclusive content there. I don't think a Sony acquisition makes much sense. Sony seems primarily interested in farming out game development to third parties and raking royalties."

Sony was not available for comment and a Microsoft spokesperson would only say, "Sega is a premiere third party publishing and development partner who we intend to work with for many years to come. As far as a potential purchase, we have no comment on the current rumors and speculation."

Sega's financial woes came to a head last year when the company decided to take on game giant Electronic Arts .

"Poor Sega," said Pachter, "They picked the wrong fight. Sega's basketball and football games were terrific, but EA had the marketing muscle to crush them and they did."