TOKYO - Game developer Tecmo has rejected a friendly take-over bid from game giant Square Enix, Tecmo announced on Thursday.

Instead, Tecmo has stated merger talks with rival developer Koei. "In the present (harsh business) environment, we intend to use our mutual strengths and superb financial standings to enhance profitability, while striving to build our business base and aggressively develop as a leading world company. To that end we have started merger talks," the companies said in a statement. The new partners plan to hammer out a merger agreement by the first part of November.

Tecmo is currently ranked twentieth in worldwide game sales, while Koei ranks 9th. Together they could surpass Sony Computer Entertainment to take the 8th spot.

On August 29 Square Enix announced its merger bid, offering to buy Tecmo shares at 930 yen ($8.73) apiece, a premium of 30 percent over the then latest asking price -- a bid that could have been worth as much as $206 million. Square Enix gave Tecmo until September 4 to accept the bid or reject it. Square Enix said at the time that it would not pursue the bid if Tecmo rejected it but on hearing of the Tecmo-Koei talks, Square Enix issued a statement challenging the decision and demanding an explanation for why the Koei merger deal was better for Tecmo shareholders.

Founded in 1967 Tecmo has created such hit games as Dead or Alive, Ninja Gaiden and Tecmo Bowl.

Launched in 1978, Koei is a game developer and publisher best known for its historical simulation and action games, including Dynasty Warriors and Samurai Warriors.