Japanese PC memory maker Elpida Memory <6665.T> will buy all the DRAM chips made by Taiwan's Powerchip <5346.TWO> as it looks for alliances to bolster its competitiveness in a market torn by oversupply and depressed prices.

Elpida, the world's No.3 maker of dynamic random access memory chips (DRAM) behind South Korea's Samsung Electronics <005930.KS> and Hynix Semiconductor <000660.KS>, will sell those chips under the Elpida brand.

Elpida and Powerchip are long-term partners and operate the Rexchip joint venture in Taiwan, while the Japanese company outsources some production to Taiwanese firms ProMOS Technologies <5387.TWO> and Winbond Electronics Corp <2344.TW>.

Some kind of merger between Elpida and Powerchip has long been the subject of speculation as smaller DRAM makers look for the scale to deal with big Korean firms, but Powerchip said on Monday it had no plans to sell its DRAM business to its partner.

For Elpida shareholders, instead of buying the entire business, holding a bigger percentage of the DRAM market could be reassuring, said Makoto Takeuchi, an investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

Elpida had cut its output late last year due to a weak DRAM chip market, hit by sluggish PC sales.

Research firm Gartner expects the global DRAM chip market to shrink by 16 percent this year, although NAND-type memory chips are likely to grow 24 percent, thanks to booming sales of high-end mobile devices such as smartphones and tablets.

Elpida has agreed to double its procurement from Powerchip to the equivalent of 80,000 silicon wafers per month, a source familiar with the matter said.

Elpida will also obtain an additional 30,000 units made at Taiwanese subsidiary Rexchip Electronics <4932.TWO> that is currently allocated to Powerchip, the source said.

Taiwan had previously planned to set up a new firm to incorporate the country's chipmakers. The new firm was to have formed a capital tie with Elpida and share technology, but the deal fell apart after the Taiwanese government scrapped a plan to inject funds into the firm.

Powerchip, which makes DRAM chips mainly for PCs, posted a net profit of T$1.94 billion ($67 million) in the third quarter. Its shares rose by the daily maximum of 6.8 percent on Friday, the last day of share trading before a week-long Lunar New Year holiday.

Shares of Elpida ended 3 percent lower in Tokyo, underperforming a 1.2 percent drop in the benchmark Nikkei average <.N225>. The company plans to list on Taiwan's stock exchange this year, seeking to raise around $120 million.

(Additional reporting by Argin Chang in Taipei; Writing by Junko Fujita; Editing by Nathan Layne and Vinu Pilakkot)