Intel will buy fellow chipmaker Altera for US$16.7 billion (A$22 billion) as the company seeks to combat slowing demand from the PC industry by expanding its line-up of higher-margin chips used in data centres.
By combining with Altera, Intel will be able to bundle its processing chips with the smaller company's programmable chips, which are used, among other things, to speed up web searches.
Intel said it would offer US$54 per share for Altera, a 10.5 percent premium to Altera's close on Friday.
Altera's shares were changing hands at US$51.78, well below the offer price, prior to the announcement.
That suggested that some investors felt the deal could face regulatory hurdles, but analysts said there was virtually no overlap of products between the companies.
Intel's shares were down about 1.7 percent at US$33.86.
The deal valued Altera at about 9 times forward revenue, according to Thomson Reuters data.
"It seems very high to me," Stifel, Nicolaus & Co analyst Kevin Cassidy said. "The last one I remember that was close was Broadcom buying NetLogic at 8 times forward revenues, and that didn't turn out very well for Broadcom."
The deal price is unchanged from Intel's unsolicited offer that sources had said Altera rejected in April.
The integration of Altera's chips with Intel's will create a new class of products giving customers a significant improvement in performance, lower costs and a lot more flexibility, Intel chief financial officer Stacy Smith said.
Intel looked at other targets, but Altera was the best bet to create value for the shareholders, Smith said.
The transaction is the third big deal in the highly fragmented chip industry this year. In the industry's biggest-ever deal, Avago Technologies agreed last week to buy Broadcom for US$37 billion.
Altera's programmable chips will allow Intel to increase the computational capability of its Xeon server chips, which could be under attack post the Avago-Broadcom merger, Summit Research analyst Srinivasan Sundararajan said.
NXP Semiconductors set off the latest round of deals in March when it agreed to buy Freescale Semiconductor for US$12 billion.