AMD plans to acquire graphics chip maker ATI in a cash and shares deal valued at $5.4bn.
The merger has been agreed by the boards of both companies, but requires the approval of ATI shareholders and will be subject to US regulations.
AMD chairman and chief executive Hector Ruiz claimed that the two firms have complementary strengths.
"Bringing these two great companies together will allow us to transcend what we have accomplished as individual businesses," he said.
Dave Orton, president and chief executive at ATI, added that the deal would allow ATI to grow more quickly.
"All our product lines will benefit," he said. "Joining with AMD will enable us to innovate aggressively on the PC platform, and continue to invest significantly in our consumer business to stay in front of our markets."
The deal is expected to be completed by the fourth quarter of this year. The combined entity could result in cost savings of $75m by the end of 2007.
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