Axalto, the world's second largest smart-card provider, is offering to buy its larger rival Gemplus in an all-share deal that would create an industry giant with combined 2005 sales of 1.8 billion euros ($2.1 billion).
If the deal goes ahead, Gemplus shareholders would end up with 55.5 percent of the combined business, which, at Tuesday's closing price, would have a total market capitalisation of 2.3 billion euros.
Axalto would own 44.5 percent of the new entity called Gemalto, to be registered in the Netherlands. Shares in both stocks were suspended during the morning session, but later resumed trading.
Axalto was up 9.3 percent at 25 euros by 1140 GMT. Gemplus initially rose as much as 3 percent before falling back to trade down 2.2 percent at 2.25 euros.
Analysts said the transaction could be referred to the European Competition Commission as the two companies together have about half of the world market for mobile phone SIM cards.
The pair, whose smart cards are also fitted in credit cards and pay-TV set-top boxes, have about 48 percent of the global market for smart-cards with microprocessors.
"The deal is likely to be looked at closely by competition authorities," said one London-based analyst.
The running of the newly formed business will be shared between Gemplus Chief Executive Alex Mandl who will act as executive chairman and Axalto Chief Executive Olivier Piou who will be chief executive.
Shareholders, who also have to approve the deal, could express concern about the efficiency of a dual executive, some analysts said.
Gemplus shareholders will be offered two Axalto shares for every 25 of their own and receive an exceptional pay-out of 0.26 euro a share - 163 million euros in total - prior to the proposed exchange.
In light of the two companies' solid cash resources, the pair said they would propose, once the deal was closed, a share buy-back covering up to 10 percent of Gemalto shares.
Analysts said Gemplus shareholders would receive Axalto shares worth about 9 percent less than the market value of their Gemplus shares based on Tuesday's closing price.
Gemplus shareholders would get stock worth 2.09 euros per share for shares that closed at 2.3 euros on Tuesday.
"This represents a small discount for Gemplus shareholders," one Paris-based analyst said. "This deal comes as a surprise for us." The merger will help the companies make savings but will also lead to one-time restructuring costs of 43 million euros.
The pair said there would be "limited job reductions" among their research, development and manufacturing staff but did not say how many jobs would be cut.
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