Japanese chip makers NEC Electronics and Renesas Technology have entered merger discussions, they said Monday.
The announcement heralds a new round of consolidation in Japan's semiconductor industry.
Renesas was built from the merging of chip divisions from Hitachi and Mitsubishi Electric after the dot-com bubble burst earlier this decade, while NEC Electronics was spun off from NEC around the same time.
The merger discussions were prompted by fierce global competition in the semiconductor market, the companies said in a joint statement.
Over the next few months the companies will discuss future plans and have a closer look at each others' financial books and businesses. They expect to sign a formal deal by the end of July and integrate operations by April 1, 2010, they said.
"Japanese chip makers usually do this kind of consolidation during downturns," said Rick Hsu, chip industry analyst at Nomura Securities in Taipei.
"They can eliminate overlap this way. Efficiency will improve, but we will likely see some layoffs," he added
The combination of the two companies will create the world's third largest chip maker, with leading market share in micro-controllers, and system-on-chip (SoC) products for cars and mobile devices.
The companies will have to obtain government regulatory approval for a merger.
Chip makers around the world are suffering amid the global recession. Germany's Qimonda filed for bankruptcy in January, while Spansion of the U.S. followed in March.
In addition, the Taiwan government has formed a new company to lead consolidation among its heavily indebted DRAM makers.