Sega, famous for Sonic the Hedgehog, had been in negotiations with pinball machine maker Sammy Corp. about integrating their operations since February.
But Tokyo-based Sega called off the talks Thursday after concluding that the merger would not bring benefits initially anticipated.
Another possible suitor, videogame rival Namco, announced Thursday it had withdrawn its offer to combine operations with Sega after Sega failed to provide an immediate response to its offer.
Sega had said last month it was studying the Namco offer which would have created the biggest video-game maker in Japan.
“If Sega comes up with a new proposal in the future, we are ready to consider it,” the Tokyo-based Namco said on its Web site.
Once a major pioneer in its field, Sega has watched its brand image lose its luster in recent years as gaming became dominated by Japanese rival Sony Corp.’s PlayStation 2.
Media reports have speculated that Sega’s potential suitors also include big names like U.S. software giant Microsoft Corp., which makes the Xbox game console, and Electronic Arts, a Redwood City, Calif.-based game maker.
Sega said it now expects a larger-than-expected profit for the just-ended fiscal year. On Thursday, the company forecast a profit of 3 billion yen ($25.6 million) on sales of 197 billion yen ($1.68 billion) for the year ended in March.
In February, Sega predicted a profit of 500 million yen ($4.3 million) on sales of 195 billion yen ($1.67 billion) for the year. In the previous year, it lost 17.8 billion yen, its fifth straight annual loss.
Sammy reported a profit of 23.9 billion yen in fiscal 2001, while Namco’s profits totaled 2 billion yen.
Based in Tokyo, Sammy makes pachinko machines for the popular vertical pinball game played in parlors across Japan, but is trying to expand into video games.