Abu Dhabi's state-owned ATIC offered to buy Chartered Semiconductor for $1.8 billion, while major shareholders in Hynix <000660.KS> began the sale of a $2.8 billion stake, kickstarting consolidation in a chip sector emerging from its worst ever downturn.

Signs of recovery among semiconductor makers that have been hammered by chronic oversupply and weak demand have prompted expectations that stronger players will take out weaker rivals in an effort to boost market share and better control production.

Loss-making Singapore contract chipmaker Chartered Semi, which makes the chips for Microsoft's Xbox 360 game console, has struggled against bigger Taiwan competitors, and the deal with ATIC may help it tide over its financial woes.

Consolidation in the foundry business has not progressed as much as it has in the memory or logic sectors, Mizuho Investors Securities analyst Yuichi Ishida said. I wouldn't be surprised if consolidation should progress further among foundries as development costs on cutting-edge chips grow.

Bigger foundries, which supply chips for fabless chip designers and chipmakers that own their own plants but are increasingly outsourcing production, could spend more to upgrade technology and win more orders for a new-generation of personal computers, cell phones and flat-screen TVs.

Japan's Toshiba Corp <6502.T> was in talks with Chartered Semi and Globalfoundries about outsourcing production of some of its next-generation system chips to help cut costs, two company sources said on Monday.

Advanced Technology Investment Co (ATIC), fully owned by the Abu Dhabi government, is growing its investments in the semiconductor industry, currently consisting of a facility in Dresden, Germany and a state-of-the-art facility under construction in New York.

ATIC CEO Ibrahim Ajami told Reuters in an interview that the firm was eyeing more acquisitions with the aim of becoming a global leader in semiconductor technology.

Earlier this year, ATIC spent $2.1 billion on a 55.6 percent stake in Globalfoundries, a joint venture with Advanced Micro Devices Inc .

Chartered Semi is 62 percent-owned by Singapore investment agency Temasek Holdings , which is backing the ATIC deal.

For a related Graphic, click http://graphics.thomsonreuters.com/099/SG_CHSEMI0909.gif

SAMSUNG SPECULATION

Abu Dhabi's bid followed speculation that top memory chipmaker Samsung Electronics <005930.KS> of South Korea plans to buy U.S. memory chip designer Rambus , sending Rambus shares sharply higher on Friday.

State-supported Taiwan Memory Co is leading efforts to consolidate the island's struggling smaller DRAM memory chip makers and has chosen Japan's Elpida Memory <6665.T> as a technology partner to jointly develop new chips.

ATIC did not rule out a possible merger of Chartered Semi and Globalfoundries, which could create a major rival to TSMC <2330.TW> and UMC <2303.TW>, the two Taiwanese firms that control about two-thirds of the $20 billion chip foundry market.

Analysts saw no imminent threat to TSMC and UMC , but said pricing pressure could intensify if a combined Chartered/Globalfoundries aggressively boosts market share by selling chips at a relatively lower price.

If they want to get a bigger market share, they might just use a low-price strategy, but that won't be a good thing for the whole market in terms of pricing, said Kenneth Lee, a vice president at Taiwan's Fubon Securities Investment Services.

In Taipei, TSMC shares closed up 3.3 percent and UMC gained 4.9 percent on optimism over rising sales in the fourth quarter. Both outpaced the main TAIEX's <.TWII> 1 percent rise.

Toshiba gained 3.4 percent in a Tokyo market <.N225> up 1.3 percent.

STRUGGLING SECTOR

Korea Exchange Bank <004940.KS> said former creditors, and now shareholders, of Hynix Semiconductor Inc would this week invite bids for a stake in the world's No.2 memory chipmaker, and planned to pick a preferred buyer by the year-end.

The buyer of the stake will gain control over loss-making Hynix. Steelmaker POSCO <005490.KS> and consumer electronics giant LG Electronics <066570.KS> have been touted as potential acquirers.

Although prospects are brighter for the memory chip sector, battered by a steep 2- year downturn and falling prices, analysts were not optimistic about a quick sale of Hynix.

Hynix couldn't find a suitable investor for many years, and the situation is unlikely to change all of a sudden, said Peter Yu, an analyst at BNP Paribas in Seoul.

($1=1.438 Singapore Dollar)

(Additional reporting by Mayumi Negishi in TOKYO, Marie-France Han and Kim Yeon-hee in SEOUL; editing by Ian Geoghegan and Karen Foster)

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