Sony Corp, Toshiba Corp and Hitachi Ltd will merge their liquid-crystal display operations using $2.6 billion of government-backed funds to fend off growing competition from rivals in South Korea and Taiwan.

Innovation Network Corporation of Japan (INCJ), Hitachi,Ltd., Sony Corporation and Toshiba Corporation announced today that they have signed a non-binding Memorandum of Understanding to integrate their small- and medium-sized display businesses, which are operated by subsidiaries of Hitachi, Sony and Toshiba, in a new company to be established and operated by INCJ (NewCo). INCJ, Hitachi, Sony and Toshiba are aiming to sign definitive and legally-binding agreements in the Autumn of 2011 and to complete the business integration in the Spring of 2012, subject to the receipt of any necessary government approvals.

The Innovation Network Corp of Japan (INCJ) will invest about 200 billion yen ($2.6 billion) in the merged unit, taking a 70 percent stake. Sony, Toshiba and Hitachi will each take a 10 percent stake, the three firms said on Wednesday.

All of the issued shares of subsidiaries of Hitachi, Sony and Toshiba engaged in the small- and medium-sized display business (i.e., Hitachi Displays, Ltd., Sony Mobile Display Corporation and Toshiba Mobile Display Co., Ltd., ) and other assets are planned to be transferred to NewCo.

The merger will create the world's largest maker of small panels used in smartphones and tablet PCs, leapfrogging global leaders Sharp and Samsung Electronics.

The global market of small- and medium-sized displays is expected to grow rapidly due to anticipated strong demand for high resolution, high value-added products, particularly for smartphones and tablet computers, and superior high resolution display technology, in which Japanese companies are world leaders, is key to competitiveness. NewCo is expected to utilize the world?s best high value-added technologies and establish new production lines by utilizing capital, which will be provided by INCJ, in order to meet the market demand for high value-added products.

In order to maintain and enhance the world's best technologies, NewCo is also expected to invest in the world's most advanced research and development. This investment will focus on the development of high-potential next-generation technologies, including higher resolution and thinner Organic light-emitting diode (OLED) displays, in an effort to drive forward the market as a whole.

Each of INCJ, Hitachi, Sony and Toshiba plans to appoint the outside directors of NewCo. Also, INCJ, Hitachi, Sony and Toshiba intend to provide NewCo with technical support, and NewCo will establish a strong governance framework and business infrastructure.

"This is a landmark project for INCJ in our mission to make impactful, long-term and hands-on investments to grow next-generation businesses worldwide in the spirit of open innovation," said Kimikazu Noumi, CEO of INCJ. "The new company will become a leading small- and medium-sized display manufacturer, and by pooling compelling technological know-how, will be positioned to win in a competitive and lucrative global growth market that has a real impact on the quality of people?s everyday lives."

The three firms together controlled 21.5 percent of the market for small and medium-sized displays last year, larger than Sharp with 14.8 percent or Samsung Mobile with 11.9 percent, research firm DisplaySearch estimates.

All three companies had hesitated about investing in a new line to compete against Sharp, which is due to receive a $1 billion investment from Apple, or South Korean rivals LG Display and Samsung Mobile Display, which have supply agreements with key clients.