By Taiga Uranaka and Mayumi Negishi
TOKYO (Reuters) - Hitachi Ltd <6501.T>, Japan's biggest industrial electronics firm and Mitsubishi Heavy Industries Ltd <7011.T>, the nation's leading heavy machinery maker, may merge to a $150 billion revenue infrastructure firm, three sources said on Thursday, but warned that the companies may struggle to forge a pact.
A murky global outlook for nuclear power -- both companies build reactors -- in the wake of Japan's nuclear crisis and profit-sapping yen strength is spurring talks to combine their infrastructure and other core businesses in a new company in 2013, one source with direct knowledge of the matter said.
Traditionally seen as a last resort of failing companies, Japanese corporations until recently have largely eschewed strategic mergers. A combination of two of Japan's oldest, most established conglomerates would mark a deeper embrace of mergers as a tool for corporations to squeeze costs and gain competitive scale.
A deal would mark a significant shift in a business landscape dominated by large, sprawling conglomerates with close ties to peers across a range of different industries.
"It's going to be a history-changing event if true," said Fujio Ando, senior managing director at Chibagin Asset Management. "It would really be praiseworthy if they can really move this forward because the merger means they will be creating a new company with companies from different ex-zaibatsu or business groups. This used to be seen as extremely difficult."
Any failure to agree on a merger pact, however, would mark a major embarrassment and setback for particularly for Hitachi, which with a market value of $27 billion, would likely be the acquirer of Mitsubishi Heavy, valued at nearly $16 billion as of Wednesday's closing price.
"Many of the key questions remain unaddressed. Who will take leadership in what? What will happen to overlapping businesses? What happens to each company's alliances? There is still some confusion internally," said one executive with direct knowledge of the talks.
Hitachi and Mitsubishi Heavy said in separate statements that no agreement had been reached on a merger. Hitachi President Hiroaki Nakanishi was quoted as saying they would begin negotiating a deal, but sources said that a planned Thursday announcement had been postponed, raising further concerns that talks might be called off.
Shares in both companies rose, with Hitachi, the likely dominant partner in any tie-up, rising 3.2 percent, and Mitsubishi Heavy jumping 4.3 percent.
A merger between the two industrial groups has not yet been discussed with workers, a union official said
"We have not heard about the merger. It was a big surprise to find out about the talks in the paper," said an official at Hitachi Workers Union, which represents around 30,000 workers at Hitachi. The official, who declined to give his name, said his union couldn't comment until it had more information on the proposed merger.
Managers at Hitachi however, will likely have to seek the understanding of their workers before any agreement to absorb Mitsubishi Heavy because doing could result in the sale or closure of some units.
"We think this could mean the continuation, acceleration of Hitachi's exit from non-core businesses and measures to leverage group company profitability," Goldman Sachs analyst Ikuo Matsuhashi said in a report on the media reports, describing any merger decision as "a surprise."
YEN UP, ECONOMY DOWN
Spurring a revamp is a gain in the yen to record levels and a weak global economic outlook that is prompting more Japanese companies to mull mergers with rivals, in a bid to lower costs and stay competitive, say analysts.
Hitachi makes products ranging from rice cookers, televisions to excavators, lawn mowers and computer chips and projects annual sales this business year of 9.5 trillion yen. The company, which employs 360,000 people, said on Wednesday it would halt production of television panels.
Mitsubishi Heavy is Japan's leading aircraft builder, defense contractor, a major shipbuilder and the lead system integrator for Japan's space program. A major partner of Boeing Co <BA.N>, it racks up sales of annual sales of about 3 trillion yen with 69,000 workers worldwide.
By combining their reactor businesses, Hitachi, which makes boiling-water reactors, would have access to Mitsubishi Heavy's pressurised-water reactor technology, which has become the technology of choice by countries around the world.
Mitsubishi Heavy would be better positioned to weather an industry downturn as nations around the world demand more stringent safety requirements in the wake of the Fukushima nuclear power plant crisis.
Hitachi has a nuclear power joint venture with General Electric <GE.N>, while Mitsubishi Heavy has teamed up with industry giant Areva <AREVA.PA>. Their common rival is Toshiba Corp <6502.T>, which has acquired U.S. nuclear unit Westinghouse and is aggressively bidding for contracts in China, Southeast Asia and the Middle East.
(Aditional reporting by Jochelle Mendonca and Megha Mandavia in Bangalore and Tokyo Company News Team; Editing by Lincoln Feast and Dean Yates)