Updated from 1:04 p.m EDT

Two of Europe's largest chip companies are combining their wireless chip efforts to corner a larger slice of the fast-growing cell phone market.

STMicroelectronics

(STM) - Get Report

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and

NXP

announced plans Thursday to form a joint-venture that would merge both companies' wireless chip businesses by the third quarter of the year.

The deal would create the third largest player in the wireless chip market, with $3 billion in combined revenue in 2007 and strong ties to most of the major cell phone handset makers.

In a conference call with analysts and the press following the announcement, STMicro CEO Carlo Bozotti said the deal provided significant opportunities to leverage investments in research and development, but that the primary strength of the joint venture was its customer relationships.

"This deal is about creating scale in a market with too many players," said Bozotti.

The emergence of a European wireless giant adds further pressure on

Texas Instruments

(TXN) - Get Report

, which has seen its once dominant position as the top provider of cell phone chips eroded as rivals made inroads at key customers such as

Nokia

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, the world's No.1 handset maker.

A Nokia executive blessed the deal in Thursday's announcement, stating that the wireless semiconductor industry requires consolidation, and welcoming the creation of new strong player to server handset makers.

The two companies also count handset makers Samsung and SonyEricsson as customers, and Bozotti said the goal was to expand the yet-to-be-named company's current 14% share of the wireless chip market by winning more business at existing customers and gaining new customers.

"We look forward to growing this business at an accelerated rate,"

Shares of STMicro were down 12 cents at $11.11 in midday trading Thursday.

Texas Instruments and

Qualcomm

(QCOM) - Get Report

shares were each up about 2.5%, trading at $30.30 and $42.57 respectively, suggesting that investors were not overly concerned about the new competition across the Atlantic.

The deal comes amid speculation that Europe's three largest chip companies might join forces to create a pan-European chip giant, along the lines of the Airbus consortium in the aviation industry.

Tuesday's deal however does not include

Infineon

( IFX), the third European chip firm, and the fifth largest semiconductor company by revenue in 2007, according to industry research firm Gartner.

Under the terms of Tuesday's deal, STMicro will take an 80% stake in the joint venture, and will pay NXP $1.55 billion in cash.

The deal also provides for an exit mechanism for NXP's 20% stake, which would effectively result in NXP divesting itself completely of its wireless chip businesses, to focus on chips for the automotive market, home electronics and a few other industries.

The parent companies expect more than $250 million in annual "cost synergies" to result from the venture by 2011. STMicro said it expects the transaction to have a positive impact on its adjusted EPS in 2009.

STMicro and NXP executives said combining forces would allow the two companies to better leverage their investments on research and developments. The planned $800 million R&D budget for the new venture means less duplication of efforts than when each company was individually spending $400 million on wireless chip R&D.

The venture will have the technology to sell cell phone chips that cover the spectrum of standards, from 2G and 3G, to GPS and Ultrawideband. According to the announcement, the new company will rely on third-party chip manufacturing facilities, including those of its parent companies as well as of foundries.

Bozotti and NXP CEO Frans van Houten will each sit on the new company's board of directors. The management team will be determined by the time the deal closes, with STMicro appointing the CEO and NXP appointing the CFO.

STMicro said it will also provide $350 million in cash for the venture's initial working capital.