Japan's NEC Electronics and Renesas Technology are in talks to merge next year to create the world's third-biggest chipmaker after Intel and Samsung Electronics.
Semiconductor makers, hammered in a prolonged downturn due to oversupply, price plunges and sluggish chip demand, have been joining forces to survive.
Analysts have said NEC Electronics and Renesas' move, which was widely expected, could be followed by Toshiba seeking a chip tie-up with Fujitsu as the two had reportedly discussed possible mergers of operations with NEC Electronics.
Deutsche Securities analyst Takeo Miyamoto said agreeing on a merger was the easiest step for NEC Electronics and Renesas, but they would have to make even tougher decisions from here.
"The companies have a lot of overlapping businesses, and it would be impossible to keep all of the operations," he said. "We will be closely watching who makes what kind of decisions and who carries that through."
NEC Electronics, 65 per cent owned by NEC, and Renesas, a joint venture between Hitachi and Mitsubishi Electric, said they plan to merge next April, aiming to boost their global competitiveness in microcontrollers, system and discrete chips.
The new firm would aim to generate 60 per cent of sales overseas in the future, up from 44 per cent currently, the companies said.
NEC Electronics chief executive Toshio Nakajima said his company and Renesas were slashing a combined 200 billion yen in costs and did not expect the new company to be in the red.
But Hitachi chief executive Takashi Kawamura said applying for public fund would be one option for the merged entity to beef up its weak finances.
NEC Electronics and Renesas aim to sort out the details of the deal by the end of July and aim to keep the merged entity listed. NEC Electronics will probably absorb Renesas, owned 55 per cent by Hitachi and 45 per cent by Mitsubishi Electric, NEC said.