Apple Buys Small Chip Start-Up

SAN FRANCISCO -- Apple Computer(AAPL Quote) wants its own chips, and the company has agreed to acquire a small semiconductor start-up to spearhead its silicon dreams.

The deal is a surprising turn of events for acquisition-averse Apple, and represents a striking adoption of a business model that has largely fallen out of favor in the high tech industry.

Few companies today still cling to the vertically integrated business model, championed by firms like Sun Microsystems(JAVA Quote) and the late Digital Equipment, in which a company produces everything in-house, from its own chips to its own software.

Apple paid $278 million for P.A. Semi, according to a report in Forbes.com, signaling its intent to assert more control, and to further differentiate, the design of its popular iPhone and iPod devices amid a growing crop of imitators.

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According to the report, Apple, which is due to report its quarterly earnings Wednesday, negotiated the deal over the past few weeks.

Shares of Apple were up $3.65 at $163.85 in midday trading Wednesday.

"Apple buys smaller technology companies from time to time, and we generally do not comment on our purposes and plans," an Apple spokesperson told Forbes.

Currently, Apple's iPhone is believed to use a variety of chips from companies including Samsung, Marvell(MRVL Quote) and Infineon(IFX Quote).

But with competition in the smartphone sector heating up, particularly in the wake of the iPhone's success, Apple may be looking for a way to ensure that its products maintain a secret sauce.

Founded in 2003, P.A. Semis is a fabless chip firm that designs power efficient processors based on the IBM(IBM Quote) Power architecture formerly at the heart of Apple's Mac line of PCs (Apple began using Intel(INTC Quote) microprocessors in Mac PCs in 2006).

P.A. Semi's products are currently used primarily in telecommunications and networking gear. But the chips' performance and power-efficiency could make them ideally suited to serve as the iPhone's application processor -- a type of chip for which Texas Instruments(TXN Quote) is best known.

In June, Intel is due to release the Atom processors, which the chipmaker hopes will give it a shot at winning slots in the nascent category of iPhone-like devices.

With Apple's new in-house chip firm, Intel and other chipmakers may find one of the most important customers now out of reach.