According to Reuters, the new merged outfit would be bigger than Sharp as the leading maker of small liquid-crystal display (LCD) panels.
Flogging a stake in the unit to the government would help industrial conglomerate Tosh and Sony to focus on their core businesses, Reuters claimed.
It quoted Nobuo Kurahashi, an analyst at Mizuho Investors Securities in Tokyo as saying that it was a good move because it would allow both outfits to invest more in their core businesses and get the benefits of the merger through small LCD panel operations.
Both companies don't see their small LCD panel businesses as being core to their operations, however they are money spinners as they go into smart phones.
The government-backed investment fund Innovation Network is in discussions with the two firms to invest about $1.24 billion for a stake in the entity. It is starting to look like the government wants to buy 80 percent of the outfit.
The new company is set to built production lines at a Sony plant in Aichi Prefecture's Higashiura. It will reportedly mass-produce OEL (organic electroluminescence) panels.
Toshiba and Sony are crossing the i's and dotting the t's at the moment and the the entity is expected to be formed later this year.