Demand for such devices may increase around 40 percent annually until 2014, according to Nomura Research. With aggressive and cashed-up companies including Samsung Electronics entering the market, smaller players need to find ways to boost their presence.

"Facing intense worldwide competition and fast-changing market dynamics, we believe that the combined company will be in a strong position to compete and will further elevate MediaTek's global competitiveness," MediaTek Chairman M.K. Tsai said in a statement on Friday.

MediaTek is offering 0.794 of its own shares and T$1 in cash for every MStar share, or T$218.56 per share, which would value the whole of MStar at about $3.8 billion based on Friday's closing share price and total shares issued of 529.4 million, according to Reuters data.

Mediatek plans to acquire 40 percent to 48 percent of MStar through the offer and will at a later date buy the rest of the company, the statement said.

The deal was good value for MStar as the price represented around a 20 percent premium to its share price, Fubon Securities analyst William Wang said.

"The two companies are complementary in the TV and smartphone market, so it's very positive," Wang said, adding that the merged company would have around 60 percent of market share, giving itself more pricing power.

The deal will lead to more efficient allocation of the companies' resources, Wayne Liang, chairman of MStar, said in the statement.

Shares of Mediatek and MStar both closed 1.11 percent higher before the announcement at T$274 and T$182.5 respectively, compared with a 0.78 percent drop in the broader market.

"This purchase can help Mediatek stabilize its market share in 2G chips and focus on 3G, where the biggest rival is Qualcomm," said IBTS Investment Consultation Co analyst Fred Yu, adding that Mediatek has been losing share in the 2G market to MStar.

(Reporting by Clare Jim; Editing by Jonathan Standing and Ryan Woo)

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