Advanced Micro Devices is to buy Canadian graphics chip vendor ATI Technologies for about US$5.4 billion.
AMD said that the merger was a way to offer integrated products for the mobile computing and consumer electronics markets.
From 2008 onwards, it intends to offer a new range of integrated processing and graphics chips for custom applications.
The acquisition, which is subject to shareholder and regulatory approvals, would turn AMD into one of the world's largest providers of graphics chips.
ATI reported net income of $31.9 million on revenue of $652.3 million during its fiscal third quarter, which ended on 31 May. At that time, the company said revenue for the current quarter would be between $620 million and $690 million.
In the last fiscal year, a combined AMD and ATI would have made sales of about $7.3 billion.
ATI and AMD expect to complete the deal in the fourth quarter, subject to approval of ATI shareholders and U.S. and Canadian regulators.
Rumours that AMD would buy ATI have circulated for a couple months. If approved, the deal will add significantly to AMD's product line, bringing in a lineup of cutting-edge graphics chips and chipsets that include integrated graphics capabilities.
Chipsets are the component on a PC motherboard that link a processor with main memory and other components, such as a hard disk.
These additions to AMD's product line will help the company better match rival Intel, which offers its own line of chip sets with graphics capabilities. But the deal is likely to threaten AMD's relationship with Nvidia, ATI's main rival in the graphics space and an important AMD partner.
AMD will take on new debt of around $2.5 billion to finance the deal. ATI has agreed to pay AMD a termination fee of $162 million if it backs out.