S3 Signs Deal to Acquire Diamond Multimedia

S3 has signed a definitive agreement to acquire Diamond Multimedia Systems. The chipmaker says the deal lets its graphics business sell complete solutions instead of bare chips while pushing into Internet appliances and home networking, two markets where Diamond already has traction with the Rio MP3 player and the HomeFree wireless and phoneline networking line.

The war chest behind the move is substantial. S3 is also due 252 million shares of United Microelectronics Corporation stock, worth roughly $600 million at current prices, on top of about $130 million in cash on hand. The combined company plans to keep funding Diamond’s DSL and cable modem programs and to invest aggressively across appliances, broadband, home networking, and graphics. From where I sit, the graphics side of this deal is the part worth watching; the Internet appliance talk is Wall Street’s problem.