LSI Logic, a maker of storage and DVD chips, said it would buy semiconductor and software storage company Agere Systems for about $4 billion.
The deal calls for the exchange of 2.16 shares of LSI for each Agere share, valuing the Agere shares at $22.81 each.
On CNBC's Squawk Box, LSI CEO Abhi Telwalker described the move as, "a strategic deal to establish a power house in networking storage (for the) consumer."
"The combination will allow us to participate in very highly growing markets and to scale those businesses, seize the opportunity," Telwalker said.
The combined company, which will be 52% owned by LSI and 48% owned by Agere, will be called LSI Logic. LSI also said it planned a $500 million stock repurchase program.
The pair said they expected to generate cost savings reaching at least $125 million in 2008.
The deal is expected to reduce LSI's earnings per share slightly in 2007 and add to them "meaningfully" in 2008.
Standard & Poor's said it revised its outlook for LSI to "positive" from "stable" after the acquisition was announced.
S&P also affirmed its "BB-" corporate credit rating and other ratings for the chip maker.
Buying Agere adds to LSI's business in cell phones, MP3 players and other gadgets; LSI's chips are already found in devices such as computer hard drives and DVD recorders.
"The ratings reflect LSI's good liquidity and asset-light operating model, offset by the company's reliance on a limited customer base, and the challenges caused by long design cycles for its products and high costs of certain key components," said S&P's credit analyst Bruce Hyman.
S&P said the acquisition of Agere broadens LSI's customer base somewhat, and is expected to provide some operating cost savings and enhance the company's business position with some key customers.