The acquisition is Microchip's first large buy after it aborted a $2.30 billion offer for rival Atmel Corp (ATML.O) in end-2008, just before the financial crisis hit global markets and excess capacity at chip foundries led to a slump in semiconductor prices.

Standard Microsystems, also known as SMSC, makes microcontrollers that transmit audio and video between devices attached to cars and the company counts Daimler, BMW, Audi and Harman as some of its customers.

In a conference call with analysts, Microchip Chief Executive Steve Sanghi said the acquisition would help the company add customers and technology in the fast-growing market for in-car entertainment systems.

American consumer demand for automobiles is on a rebound with new vehicle sales in the first quarter growing to its highest rate in four years.

"SMSC is the leading vendor of media networking technologies for automobiles, with over an 80 percent share in the luxury market," said Thinkequity analyst Sujeeva De Silva.

"But it's moving fast in the mainstream market in cars like Toyota, Volkswagen and GM."

SMSC, which has a market value of $588.1 million, clocked about $84.6 million in revenue from sales to automakers in fiscal 2011. The automotive segment was its third largest, but fastest-growing business.

Founded in 1971, SMSC is considered as one of the pioneers in the chip industry and specialized in providing computer networking products in its early days. In the last decade, it has expanded its market to microcontrollers for a variety of consumer electronic devices.

MARGINS AND VALUATIONS

Microchip, which has a market value of $6.77 billion, is paying $37 per share for SMSC, or about 41 percent higher than Standard Microsystems close of $26.24 on Tuesday.

The analog semiconductor industry has seen consolidation in the past one year as demand for low-cost chips rises, and most deals have commanded high valuations.

Last year Applied Materials (AMAT.O) bought Varian Semiconductor Equipment for $4.9 billion, following Texas Instruments' (TXN.O) $6.5 billion buy of National Semiconductor.

Applied paid a 55 percent premium, while TI had to shell out 78 percent more than the market price for their deals.

"Sometimes the valuations are in the eye of the beholder, Microchip felt this is the right price for them," said Capstone Investments analyst Jeff Schreiner.

Microchip's $830 million offer is based on Standard Microsystems' outstanding shares of 22.4 million, according to Thomson Reuters data.

Microchip said the total equity value of the deal would be $939 million, and after accounting for $173 million in cash and investments off SMSC's books, enterprise value would be about $766 million.

The acquisition, which is likely to be completed in the third calendar quarter, is expected to add to adjusted earnings in the first full quarter after the merger.

Microchip's shares were up marginally at $35.34 on Tuesday on the Nasdaq. Standard Micro was up 38 percent at $36.31.

(Reporting by Himank Sharma and Sruthi Ramakrishnan in Bangalore; Editing by Sriraj Kalluvila, Saumyadeb Chakrabarty)

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