Two of the world’s biggest manufacturers of semiconductor chip-making gear are merging to create a new company valued at $29 billion US.

Applied Materials Inc. of the U.S. is taking over Tokyo Electron of Japan and forming an as-yet-unnamed new company that will be incorporated in the Netherlands.

The market for tools to manufacture chips is subject to the boom and bust of the technology sector. Demand for products is slowing as PC sales slide and most companies are pinning their hopes for sales on the still-expanding market for smartphones.

The merger is part of a wave of consolidation in the industry.

The all-stock deal values Tokyo Electron at $9.4 billion, a modest premium on its share price. Shareholders of Applied Materials will own 68 per cent of the new company.

All-stock deal 

For every existing share, Tokyo Electron shareholders will receive 3.25 shares of the new company, and Applied Materials shareholders will receive one share.

Applied Materials CEO Gary Dickerson will be chief executive, and Tokyo Electron's Higashi will become chairman while the board will have an equal number of members from each company.

"We believe the combination will accelerate our momentum for profitable growth, increase the value we deliver to shareholders and create great opportunities for our employees," Dickerson said.

There has already been consolidation in the chip-making tools sector, with Dutch chip equipment maker ASML buying U.S.-based Cymer last year for about $2.5 billion while Lam Research Corp bought smaller rival Novellus Systems Inc for $3.3 billion.

Another Japanese company, Elpida Memory Inc., filed for bankruptcy protection last year.

Companies seen as strong players

Applied and Tokyo Electron are the "best of breed," said David Rubenstein, senior analyst at Advanced Research Japan.

"They have the highest profit margins, they have the best balance sheets, they make money through thick and thin," he told Reuters news agency. "So, they are not desperate, but they are hungry for earnings growth, and this is one way they can do it."

Applied Materials' net income has been falling steadily on a year-over-year basis over the past two years while Tokyo Electron reported a 23 per cent drop in quarterly sales in July.

U.S.-listed Applied Materials is the world's largest maker of semiconductor equipment by sales, followed by ASML Holding NV and Tokyo Electron, according to data from market researcher Gartner. The two companies say their product lines are complementary, rather than overlapping, but they expect to save money by streamlining operations.

The merger faces regulatory review in Japan and other jurisdictions, but Applied expects it to be approved by the second half of next year.

With files from Reuters, The Associated Press