Square originated in October 1983 as a computer game software division of Den-Yu-Sha, a power line construction company owned by the father of Masafumi Miyamoto, the eventual founder of Square Co Ltd in 1986. While at the time game development was usually conducted by only one programmer, Masafumi Miyamoto believed that it would be more efficient to have graphic designers, programmers and professional story writers working together on common projects. Square's first two titles were The Death Trap and its sequel Will: The Death Trap II, both designed by part-time employee Hironobu Sakaguchi and released on the NEC PC-8801. Despite an initial reluctance to develop for video game consoles, Square entered the Nintendo Famicom market in December 1985 with the porting of Thexder.
In September 1986, Square spun off from Den-Yu-Sha and became an independent company officially named Square Co., Ltd. Sakaguchi then became a full-time employee as the Director of Planning and Development of the company. After releasing several unsuccessful games for the Famicom, Square relocated to Ueno, Tokyo in 1987 and developed a role-playing video game titled Final Fantasy, inspired by Enix's success with the genre, Dragon Quest (later released in North America as Dragon Warrior). With 400,000 copies sold, Final Fantasy spawned multiple sequels over the years and became Square's main franchise.
Square has also made other widely known games such as Chrono Trigger, Chrono Cross, Secret of Mana, Legend of Mana, Xenogears, Brave Fencer Musashi, Parasite Eve, Parasite Eve 2, Saga Frontier, Romancing Saga, Vagrant Story, Kingdom Hearts (done in collaboration with Disney Interactive), and Super Mario RPG (done under the guidance of Shigeru Miyamoto). By late 1994 they had developed a reputation as a producer of high quality role-playing video games.
Square was one of the many companies that had planned to develop and publish their games for the Nintendo 64, but with the cheaper costs associated with developing games on CD based consoles such as the Sega Saturn and the Sony PlayStation, Square decided to develop titles for the latter system. Final Fantasy VII was one of these games, and it sold 9.8 million copies, making it the second best selling game for the PlayStation.
On February 8, 2001, due to its first quarterly loss since going public, "the company implemented a restructuring plan for its Japanese corporate staff. Three key figures have been moved around in the company ranks, resigning from their current positions in order to take responsibility for the losses, and have been reassigned to different positions. Hironobu Sakaguchi, the father of the Final Fantasy series, will no longer be vice president, and will instead be known as an "executive producer." Additionally, company president Tomoyuki Takeshi will become a contractual consultant for the company, with director Masahi Hiramatsu now taking the role of executive consultant.".
A merger between Square and its competitor Enix was in consideration since at least 2000; however, the financial failure of their first movie, Final Fantasy: The Spirits Within made Enix hesitant to join with a company which was losing money. With the company in its second year of financial loss, Square approached Sony for a capital injection and on October, 8th 2001, Sony Corp purchased 18.6% stake in Square to bandage their loss.
In an interview with GIA.com in 2001, when asked "Are you ever worried that Square will become too heavily dependent on the Final Fantasy name?" Hironobu Sakaguchi responded that "Avoiding that has actually been one of Square's goals for a long time. It is our aim to try and develop a few more major franchises for the company; that has always been on our minds."
On November 26, it was reported that Square CEO Hisashi Suzuki was to step down as the company's President and that COO Yoichi Wada was to replace him in December with a restructuring plan for the company.
On May 28, 2002 it was detailed that in Wada's restructuring of the company, that "while Square formally took a development style where teams were formed and dispersed per project, developers will now be fixed into divisions. Source codes and resources will be shared for efficiency, and employees will receive varying bonuses depending on the profit of their division. By settling developers into groups, Square also aims for the developers to re-use the titles they have developed, making game development more cost efficient. Development costs- originally 2-3 Billion yen, are expected to fall to 1 Billion yen." In addition, the company revealed plans to release two Final Fantasy X spinoffs that would later become Final Fantasy X-2.
Following the success of both Final Fantasy X and Kingdom Hearts, the company recovered its stability and recorded the highest operating margin in its history in fiscal year 2002. It was announced on November 25, 2002 that Square and Enix's previous plans to merge were to officially proceed. As described by Yoichi Wada "Square has also fully recovered, meaning this merger is occurring at a time when both companies are at their height." Despite this, some shareholders had doubts about the merger, notably Square's original founder and largest shareholder, Masafumi Miyamoto, who would find himself holding significantly less if the two RPG behemoths were to go ahead with the deal. Other criticism came from Takashi Oya of Deutsche Securities who expressed doubts about the benefits of such a merger.
"Enix outsources game development and has few in-house creators, while Square does everything by itself. The combination of the two provides no negative factors but would bring little in the way of operational synergies, he said." Masafumi Miyamoto's issue was eventually resolved, by altering the exchange ratio of one Square share for 0.81 Enix shares, thus greenlighting the merger, and on April 1, 2003, Square Enix was formed.