Advanced Micro Devices (AMD), the chipmaker that has started supplying processors for Dell computers, has agreed to buy rival ATI Technologies.
AMD has decided to expand and take on market leader Intel
AMD wants to boost sales and close the gap between it and market leader Intel.
It will pay $5.4bn, $4.5bn (£3bn) in cash and make up the rest in equity. That values ATI shares at $20.47 each, 24% more than their close on Friday.
Despite concerns about the price of the deal, analysts said buying graphics chipmaker ATI did make sense for AMD.
"It's a brilliant strategic move," said Eric Ross, an analyst at ThinkEquity Partners.
"AMD essentially have cornered the high end graphics platform for themselves. Intel is getting squeezed out there."
In electronic trading before the open of the US stock market, AMD shares dropped 8% and ATI shares jumped 16%.
AMD said the deal would help it expand its products in the commercial, mobile computing and gaming sectors.
It also would help it expand its media and emerging market offerings.