Advanced Micro Devices ( AMD), long the also-ran to Intel ( INCT) in the PC processor business, plans to buy graphics chipmaker ATI Technologies ( ATYT) in a move to shake up the semiconductor industry.

Rumored for months, the deal quickly takes from AMD having no presence in the graphics chip segment to being one of the top players. Not only should the move position the company to better compete against Intel -- which has in recent years become one of the leading graphics chip providers -- but it also gives AMD a stake in faster growing but smaller markets, such as chips for digital televisions and cell phones.

"Bringing these two great companies together will allow us to transcend what we have accomplished as individual businesses and reinvent our industry as the technology leader and partner of choice," said AMD CEO Hector Ruiz in a statement.

"This combination means accelerated growth for ATI," said the company's CEO, Dave Orton, in the statement. "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."

Under the deal announced Monday, AMD will spend about $5.4 billion to acquire ATI, including $4.2 billion in cash and 57 million shares of stock. The consideration amounts to about $20.47 for each share of ATI, including about $16.40 in cash and about .22 shares of AMD stock. That would represent a premium of about 23% on ATI's closing share price Friday of $16.56.

ATI's stock jumped on the news, rising $2.87, or 17%, to $19.43 in early trading on Monday. AMD's shares were off 78 cents, or 4%, in recent trading.

The deal has been approved by the boards of both companies, but is subject to regulatory approval. The companies expect the deal to close in the fourth quarter this year.

Excluding acquisition-related charges, AMD expects the deal to slightly add to its earnings next year and be "substantially accretive" in 2008.

Orton will become an executive vice president of AMD reporting to Ruiz and Dirk Meyer, AMD's president and COO. Additionally, two unnamed ATI directors will join AMD's board.

AMD expects to see $75 million in cost savings following the deal, but did not immediately say whether or not it planned layoff to achieve them. The company expects to maintain its own operations in Austin, Texas and Silicon Valley -- including its Sunnyvale, Calif. headquarters -- as well as ATI's main offices in Markham, Ontario.

The merger will marry two companies that had been going in somewhat opposite directions. In recent years, AMD has been gaining share from Intel, thanks to aggressive pricing and by focusing on meeting the growing demand for lower power consumption chips.

In contrast, ATI has been stumbling. The company was late in rolling out its latest top-of-the line graphics chips, causing it to lose share to chief rival Nvidia ( INTC) and forcing costly price cuts that ate into its margins and bottom line.

Assuming that customers buy into the deal, it should give AMD a bigger presence in the PC market. For the first time, the company will be able to compete head-to-head against Intel in integrated graphics chips, which represents the low-end, but high volume, portion of the graphics business. Integrated chips rely on the processing power and memory of the main CPU for graphics processing. Intel has become the leader in that segment of the market.

But the move also should allow AMD to get a piece of the sales of even computers based on Intel CPUs. That's because the company plans to continue to offer ATI's high-end "discrete" graphics processors.

Because those processors, which are typically used on expensive gaming and multimedia computers, have their own processing and memory, they can be married with either AMD or Intel CPUs. Indeed, prior to the deal, ATI had the leading position in providing discrete chips for Intel-based notebooks.