* Infineon shares down 3.8 percent, Intel shares down 1.8
percent

By Nicola Leske

FRANKFURT, Aug 30 (Reuters) - U.S. chipmaker Intel is to buy
German chipmaker Infineon's wireless unit for $1.4 billion as it
seeks to claw its way into the booming smartphone market,
reducing its reliance on personal computers.

The move, agreed on Monday, is the second major deal for
Intel within two weeks. The company announced its $7.7 billion
offer for McAfee Inc on Aug. 19, its largest acquisition,
bolstering the appeal of its chips as it tries to expand further
into the mobile market.

"Infineon fills a strategic gap," said Anand Chandrasekher,
general manager of Intel's Ultra Mobility Group.

"As multiple devices proliferate around the planet, we
cannot depend on one technology alone," he added.

Intel dominates the market for PC microprocessors. Its Atom
mobile chips took the low-cost, no-frills netbook market by
storm but are rarely found in smartphones.

Intel, which sold its chip business for mobile handhelds and
cell phones to Marvell Technology for $600 million four years
ago, faces pressure as Apple's iPad and other tablet computers
chip away at demand for notebooks and PCs.

And while a shaky economic recovery may make families think
twice about upgrading their computers, experts say future growth
in the microchip industry lies in smartphones and tablets, areas
that Intel is far from dominating.

STANDALONE UNIT

Intel plans to keep Infineon's mobile unit independent once
the cash-transaction closes in the first quarter of 2011.

"We have learned from our experience over the past 20 years
that many of our previous acquisitions have not been as
successful as we would have liked them to be, that's why we are
keeping this entity independent," said Arvind Sodhani, executive
vice president of Intel.

UBS analyst Maynard Um said: "Intel's acquisition of (the
unit of) Infineon creates a well-funded industry competitor
looking to compete and invest in the roadmap over the longer
term."

Chandrasekher declined to say how much Intel had earmarked
to invest in the business, saying only Intel planned to
eventually become market leader in the mobile chip segment.

Meanwhile, rivals based on UK-listed ARM's chip design --
which is said to be more power-efficient than Intel's offerings
-- continue to grab market share.

Infineon shares fell 3.8 percent to 4.434 euros by 1509 GMT
in Frankfurt, widening losses to Friday's close after Intel
warned its third-quarter revenue would fall short of its own
expectations due to weak consumer demand on personal computers.

"Investors had hoped for a higher price and additionally we
expect profit-taking on the long-expected deal," analysts at
Alpha brokerage wrote.

Three people familiar with the matter had told Reuters on
Friday that Intel and Infineon would likely reach an agreement
on the business's future within the next few days.

Intel shares were down 1.2 percent at $18.16. At least three
brokerages cut their price targets on Intel's stock on Monday,
bracing for a weak quarterly performance from the semiconductor
bellwether.

SPECIAL DIVIDEND FOR INFINEON?

The deal will allow Infineon to focus on its core segments
-- automotive, industrial and chip card security.

"We didn't have to sell wireless but there is one thing I
have learned over the past 15 years, at the end of the day in
technology portfolio size matters if you want to maintain
leadership position, " said Chief Executive Peter Bauer.

Bauer, who took the helm in mid-2008, turned around the
mobile chip unit after years of losses. It now generates around
30 percent of Infineon's total revenue but it ranks No. 5 in the
chipset industry, far behind sector giants Qualcomm, Texas
Instruments and Broadcom.

Infineon, based in Neubiberg near Munich, supplies chips to
companies such as Nokia, LG and Apple.

Asset sales may also open the door for a special dividend
for Infineon shareholders, who have not seen a payout in years.

Bauer said he could not comment on a dividend.

The deal comes amid a flurry of global M&A activity as
companies struggle to boost revenue in a weak economy.

According to Thomson Reuters data, nearly $200 billion in
mergers and acquisitions has been announced in August, already
making it the third-best month so far this year in terms of
money committed to deals.

(Additional reporting by Noel Randewich in San Francisco,
Manasi Phadke in Bangalore and Sinead Carew in New York)
($1=.7861 euros)