Dialog, which is heavily exposed to Apple and Samsung, said the deal would diversify its client base in automotive markets as well as network-connected chips used in industrial gear, also known as the "Internet of Things."
Based in San Jose, California, Atmel manufactures small processors called microcontrollers that are used in a variety of electronics and other hardware in this connected device area.
Dialog had been looking to expand its industrial offerings since its talks broke off last year to merge with Austria's AMS, which made sensors.
"The rationale for our acquisition is to build a complementary business to power savings and power management and it gives us a better platform for the 'Internet of Things'," Jalal Bagherli, Dialog's Chief Executive, said in an interview.
Besides microcontrollers, Atmel also has touch-screen and encryption technology that attracted Dialog, he said. There is only a 5 percent overlap in the two companies' product lines, Bagherli added.
Some $80 billion in semiconductor M&A has been racked up so far this year, the biggest year for chip deals since 2000, according to Thomson Reuters data.
Reuters was first to report in June that Atmel had hired investment bank Qatalyst Partners to advise it on a sale process.
Dialog, which is headquartered in the United Kingdom but has its shares listed in Germany, said Atmel shareholders would receive $4.65 in cash and 0.112 of a Dialog Semiconductor American Depository Share for each Atmel common share, equivalent to $10.42 per Atmel share based on Dialog's closing price as of Sept. 18.
This represents a 43-percent premium over Atmel's closing price of $7.27 on Friday.
Dialog said it planned to pay for the deal via cash, $2.1 billion of debt and about 49 million Dialog American Depository Shares. Atmel shareholders will own about 38 percent of the combined group.
The transaction, expected to close during the first quarter of 2016, will boost Dialog's earnings in 2017 and result in annual cost savings of $150 million within two years.
Dialog's financial adviser was Morgan Stanley while David Polk & Wardwell and Reynolds Porter Chamberlain served as legal advisers. Atmel financial adviser was Qatalyst Partners and its legal adviser was Jones Day.