Japan's Kawasaki Heavy and Mitsui Engineering in merger talks

The Nikkei reported that Japan’s Kawasaki Heavy Industries Ltd. and Mitsui Engineering & Shipbuilding Co. are in merger talks that could create a heavy machinery company with close to ¥2 trillion (US$20.2 billion) in sales.
The deal would mark the first large-scale heavy industry realignment since the 1960 merger that created what is now IHI Corp.
The paper cited sources who said that the two firms already have hired financial advisers and are ready to discuss a merger format, perhaps integrating under a holding company. The deal could be completed as early as next fiscal year, it said.
The merger would create a heavy machinery company second only to Mitsubishi Heavy Industries Ltd. in terms of sales. Kawasaki Heavy generated group sales of ¥1.28 trillion (US$12.9 billion) for the year ended March 2013, while Mitsui Engineering generated an estimated ¥577 billion (US$5.8 billion).
Mitsui Engineering is strong in offshore oil and gas field development; Kawasaki Heavy has a significant track record in overseas plant projects. The combination would be an engineering powerhouse in the energy plant industry.
But the driving force behind the merger is said to be their shipbuilding business. Japanese shipbuilders, which traditionally controlled more than 50% of the global market, have seen their share taken away by their South Korean and Chinese competitors partly due to the strong yen which made their products more expensive. Today, South Korea and China jointly control more than 70% of the market. In addition, global demand for new vessels has collapsed; the industry is now bracing for the likelihood that hardly any ships will be built domestically in 2014.
One effective strategy might be to focus on higher-value vessels, such as eco-friendly models, demand for which is expected to grow now that global fuel-efficiency standards for ships are planned.
A Kawasaki Heavy-Mitsui Engineering integration “would enable the partners to further strengthen infrastructure and other businesses that have high growth potential,” Nikkei quoted Masayuki Kubota, senior fund manager at Daiwa SB Investments Ltd., as saying.
Even with the merger, the two Japanese firms still would face an uphill battle. Their combined global market share is less than 3% and capacity utilization rates at Japanese shipyards are forecast to decline further, the Nikkei said.