Consolidation in the semiconductor industry continues to heat up, as Microchip Technology Inc. today agreed to acquire its rival Microsemi Corp. in a deal valued at $8.3 billion.

Microchip, which targets a broad range of industries with its offerings, said it will pay $68.78 per share in cash to acquire Microsemi, which is one of the largest suppliers of computer chips to the aerospace and defense industries. The announcement follows a previously unconfirmed report that Microsemi had hired the services of investment bank Qatalyst Partners to help it look for potential buyers, after receiving an offer from an unnamed firm.

The acquisition will give Microchip a solid foothold in those industries, which currently make up just 2 percent of its annual sales. The deal also strengthens its position in the communications and computing sectors, which account for less than 15 percent of its sales.

Microchip Chairman and Chief Executive Officer Steve Sanghi told the Wall Street Journal that the deal represents an “opportunity to cross-sell our chips into end markets where they’re strong and vice versa.” He added that the acquisition brings together “two of the strongest business franchises in our industry that are highly complementary and will deliver significant value for shareholders and customers.”

Sanghi will become chairman and CEO of the combined companies once the deal is completed. It will be financed with $1.6 billion in cash from the combined company’s balance sheet, $3 billion more from Microchip’s existing line of credit and $5 billion in new debt, including a $600 million cash bridge loan.

The deal adds more momentum to a wave of consolidation in the computer chip industry that’s driven by companies’ desire to cut costs and position themselves for next-generation computing applications. “Consolidation by Microchip and Microsemi is being driven by Moore’s Law, which drives integration of smaller, discrete chips into larger chips,” said Patrick Moorhead, president and principal analyst of Moor Insights & Strategy.

Perhaps the best example of this consolidation is Broadcom Corp.’s ongoing hostile takeover attempt of rival firm Qualcomm Inc. Broadcom saw its most recent bid of $121 billion rejected, but it hasn’t given up hope of completing what would be the tech industry’s largest-ever acquisition.

For its part, Qualcomm busy trying to tie up a massive acquisition of its own. The company has been attempting to complete its takeover of Dutch semiconductor maker NXP Semiconductors N.V for more than a year. It recently upped its bid to $44 billion to ensure the deal gets done.

The widespread consolidation in the chip industry is also a signal that demand is growing faster than players can organically expand their product portfolios from their in-house research and development efforts, said Holger Mueller, principal analyst and vice president of Constellation Research Inc.

“For enterprises this may not be good news in the longer term, as more supplier power usually leads to higher prices,” Mueller said. “But it’s too early to tell at the moment, and certainly integrated offerings with synergies have a high appeal for enterprises.”

Microchip said it hopes to complete the deal to buy Microsemi much more quickly. The deal is scheduled to close by the second quarter of this year, subject to regulatory and shareholder approval.

image: Microchip Technology/Facebook