In the deal, NEC could take a stake of more than 50 percent in Casio Hitachi Mobile Communications, a joint venture created in 2004. The result would be a cell-phone manufacturer second to Sharp Corp. but still dauntingly competitive. As of the end of March, the three had a combined market share of 20.2 percent in Japan, according to research firm BCN -- compared with Sharp's 21.8 percent share.
Why forge a big merger in a country where cell-phone growth has been declining? One reason is to streamline expenses while boosting profitability. By merging, all three companies would lower production and customer-service costs. Another reason: to boost revenue from countries such as China, where the number of new mobile subscriptions should grow rapidly in the years ahead, especially as China's third generation high-speed networks become more pervasive.
Of course, boosting revenue will be the real trick long-term. Japan has been saddled with high development costs and so far has done a pitiful job of expanding its business overseas. Competing against companies such as Finland's Nokia (NOK) and South Korea's Samsung Electronics, Sony (SNE) is the only Japanese mobile company to succeed beyond its borders -- and only because of its joint venture with Sweden's Ericsson (ERIC).
Besides that, the new company will face plenty of competition overseas. San Diego-based Qualcomm (QCOM) is already generating 90 percent of its revenues from the Asia-Pacific region; Apple (AAPL) has just signed a deal with China Unicom (CHU), which will make the state carrier a new distributor of iPhones; and China Mobile (CHL) plans to unveil more than 100 cell-phone models by the end of this year and at least 200 by the first half of 2010.
How Sharp responds will also weigh in on the merger's effectiveness. Typically, large companies do a poor job of warding off disruptive threats, and now, Sharp -- as well as Japanese mobile-handset manufacturer Kyocera (KYO) -- will have to grapple with a mighty new competitor while trying to focus on their core business.
The good news is that the declining market in Japan should turn around in the next few years as demand for data applications rise and consumers need new devices. In that case, a new NEC/Hitachi/Casio company would be well positioned, should such a merger happen.