Nvidia Corp plans to buy Icera, a privately held cellphone chipmaker, for $367 million in cash, pitting it against Qualcomm Inc and Intel Corp in the booming smartphone chip market.
With this deal, Nvidia enters the market for baseband or radio chips, which connect devices to cellular networks. Its shares rose as much as 2.7 percent before giving back most of those gains by midday.
This year, Nvidia has expanded from the computer graphics chip market to the market for mobile application chips, which enable features such as video and gaming on smartphones and tablet computers.
Nvidia picked up Samsung Electronics Co, Motorola Mobility and LG Electronics as customers with that strategy. The Icera acquisition will allow Nvidia to sell cellphone makers baseband chips as well, just as Qualcomm and Intel do.
(Radio chips) seemed like a hole in the strategy to get into mobile for Nvidia, Stifel Nicolas analyst Kevin Cassidy said. This will put Nvidia on equal footing with Intel and Qualcomm.
In contrast, another big rival Texas Instruments Inc is shuttering its baseband chip business to narrow its focus to application chips.
While all of Icera's chip sales to date have been to makers of network cards used to connect laptops to the Internet wirelessly, it launched smartphone chips earlier this year.
Icera's customers include Nokia and Chinese mobile device manufacturers Huawei and ZTE as well as Samsung.
Nvidia said the deal would slightly hurt operating earnings in the first half of 2012 but it expects the transaction to add to operating earnings in the second half.
But Stifel's Cassidy said he does not expect the deal to hurt Nvidia's profit margins in the long run.
Nvidia also said that adding Icera's technology gives it the potential to double the revenue it can generate from each mobile device.
Earlier this year, rival Qualcomm agreed to buy another smaller wireless radio chipmaker Atheros for $3.2 billion.
Evercore Partners was financial adviser to Icera in the Nvidia deal.
Shares of Nvidia were up 8 cents at $19.40 in midday Nasdaq trading after reaching $19.85 earlier in the session.
(Additional reporting by Himank Sharma in Bangalore; Editing by Sriraj Kalluvila and Derek Caney)