Demand for compound semiconductors -- integrated circuit (IC) chips made of such materials as gallium arsenide instead of silicon -- is expected to boom due to their use in mobile phones, DVD players and other home appliances, Fujitsu said.

"The market for wireless, broadband, communications and information terminals that use these chips is expected to grow in the future," said Fujitsu spokesman Hiroyasu Katagiri.

"We thought we would be able to make chip products for these fields efficiently," he said.

The 50-50 joint firm capitalized at 20 billion yen (187 million dollars) will start operations April 1 and projects annual sales of 60 billion yen by March 2007, he said.

A formal announcement on the decision was to be made later Thursday after board approval at both companies, Katagiri said.

The joint firm will absorb a Fujitsu subsidiary and a Sumitomo Electric department with 27 billion yen and four billion yen in annual sales respectively projected for the year to March 2004, he said.

The merger will help trim costs and allow the firms to share technology, he said.

After the tie-up was reported in the Asahi Shimbun daily, Fujitsu's shares were down by four yen or 0.66 percent at 603 yen, while Sumitomo Electric's shares were up three yen or 0.32 percent at 937 yen at 9:45 am (0045 GMT).

The Nikkei-225 index of the Tokyo Stock Exchange was down 38.04 points or 0.37 percent at 10,333.23.

The global market for compound chips is expected to leap from 300 billion yen now to 500 billion in the year to March 2007, the Asahi said.

Compound semiconductors are more fragile than silicon chips, thereby slowing production, but are better at handling high-speed information flows, the paper said.

SPACE.WIRE