Nintendo (NASDAQOTH:NTDOY) has clearly seen better days -- Wii U sales remain weak, 3DS sales appear to have peaked, and third-party publishers keep passing over its consoles in favor of Sony's (NYSE:SNE) PS4 and Microsoft's (NASDAQ:MSFT) Xbox One.
Analysts constantly offer Nintendo the same tired advice: launch mobile games, add more microtransactions to games, abandon hardware, and develop software for competitors. One less discussed strategy, which I believe is the ideal one, is for the company to merge with, invest in, or acquire another company.
Nintendo finished fiscal 2014 with $3.3 billion in cash, which means its options are limited, but I believe that three companies -- Square Enix, Capcom, and Glu Mobile (NASDAQ:GLUU) -- represent solid investment opportunities which could reverse the company's misfortunes.
Square Enix, with a market cap of $2.65 billion, is the largest of these three choices. The company owns an appealing portfolio of games which appeal to both Western and Eastern gamers, which include Final Fantasy, Dragon Quest, Tomb Raider, Deus Ex, Hitman, and Kingdom Hearts.
Sony, Square Enix's third-largest shareholder, divested its entire stake in Square Enix back in April. That stake previously helped Sony secure exclusive Square Enix titles like Final Fantasy and Kingdom Hearts in the earlier days of the PlayStation.
If Nintendo either merges with or acquires Square Enix, it would gain access to better exclusive titles for the Wii U and 3DS, and it could generate more revenue from sales of Square Enix titles on other hardware platforms. Nintendo could keep its own flagship characters exclusive to its own hardware, get well-known characters like Lara Croft to cross over with its first party titles, and gain a stable source of non-Nintendo software revenue.
Square Enix reported $1.57 billion in revenue in fiscal 2013, but it also posted a net loss of $146 million, partially due to sluggish sales of arcade machines in its amusement business. If Nintendo buys Square Enix outright, it could sell or spin off the amusement business and focus on developing its core franchises and subscription-based MMOs like Final Fantasy IV.
Capcom is much smaller than Square Enix, with a market cap of $1.06 billion, but it has an equally appealing portfolio of IPs, which include Mega Man, Resident Evil, Devil May Cry, Dead Rising, Street Fighter, and Monster Hunter. Nintendo has also trusted Capcom to handle its first-party franchises in the past -- Capcom previously made four handheld Legend of Zelda games.
Although Mega Man has been one of Capcom's most iconic characters, the franchise has been on hold ever since series creator Keiji Inafune abruptly left Capcom in 2010. Nintendo is bringing back the Blue Bomber in Super Smash Bros. for Wii U and 3DS, which offers a glimpse at the massive crossover potential between Mega Man and Nintendo's flagship characters. Other crossovers -- like Monster Hunter and Pokemon (two of the 3DS' biggest titles), or Street Fighter and Smash Bros. -- would be impressive as well.
In fiscal 2014, Capcom's revenue rose 8.6% year over year to 102 billion yen ($974 million), and its net income rose 15.8% to 3.4 billion yen ($33 million). But operating income remained flat at 10.9 billion yen ($104 million) due to lower profitability in its PC and mobile businesses. Since operating income is Capcom's main weakness, merging its software operations with Nintendo could reduce operating expenses at both companies.
Nintendo has repeatedly refused to make mobile versions of its flagship games, believing that they would dilute its console titles and cannibalize sales of the 3DS. While the upcoming release of The Pokemon Trading Card Game on iOS was seen as a concession by some, it's hardly the full-featured Nintendo mobile game gamers and investors were waiting for.
But it's hard to deny how profitable mobile games can be. Research firm Gartner forecasts that the global mobile gaming market will nearly double from $13.2 billion in 2013 to $22 billion in 2015. Nintendo could profit in this market without compromising its core IPs by acquiring a promising new mobile game maker like Glu Mobile.
Glu Mobile, with a market cap of $500 million, is tiny compared to Square Enix and Capcom. But its growth is remarkable: Last quarter, Glu's GAAP-adjusted revenue soared 51% year over year to $35 million, thanks to strong revenue from Kim Kardashian: Hollywood and Dino Hunter: Deadly Shores. Still, the company posted a net loss of $3.8 million, which was wider than its loss of $2.9 million a year earlier. But as with Capcom, combining Glu and Nintendo's software resources could cut costs at both companies.
Nintendo could simply let Glu Mobile operate independently, but it could eventually bring more successful mobile franchises, like Dino Hunter and Deer Hunter, to the 3DS and Wii U.
A Foolish final word
In closing, Nintendo needs to seriously consider buying its way back to video game dominance. Square Enix and Capcom could give Nintendo a huge portfolio of new IPs and cross-platform games, while Glu Mobile could be a promising way to diversify into mobile gaming.
This strategy would work much better than the company's current strategy of praying that big titles like Mario Kart 8, Hyrule Warriors, and Super Smash Bros will be enough to carry hardware sales on their own.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.