Philips said it will pay $21 a share for VLSI (VLSI), a significant premium above the hostile offer that valued the company at $17 a share, or $777 million. "After reviewing non-public VLSI information and meeting with VLSI management, we have concluded there is additional value in the company,'' said Arthur van der Poel, chairman of Philips' $4.5 billion semiconductor division.

Philips plans to use the acquisition as a platform for expansion in North America. VLSI designs and makes integrated circuits for wireless communications, networking and consumer digital entertainment. After the acquisition, Philips will rank as the world's sixth-largest semiconductor company.

San Jose, California-based VLSI had rejected Philips' first offer as inadequate,but indicated a willingness to sit down at the bargaining table. Wall Street experts had expected the two sides to eventually reach a friendly agreement.

VLSI said its board of directors had voted unanimously to approve the definitive pact and recommended shareholders accept a revised tender offer from Philips. VLSI's stock closed Friday at $18.875 a share on Nasdaq. The deal is based on 46.6 million outstanding shares of VLSI, of which Philips already owns 1.2 million shares.

Philips also said it will cash out options on an additional 11.3 million shares, bringing the total value to about $1 billion. VLSI made non-public financial data available to Philips last month after the two sides hammered out a confidentiality agreement under which Philips agreed to postpone efforts to advance the hostile takeover effort.

At the time, other potential bidders were widely known to be reviewing VLSI's books. It was not immediately known if any other companies made a formal bid for VLSI. Sources familiar with thetransaction said Philips was willing to raise its offer after the due diligence process revealed positive information about VLSI's business.

Furthermore, the company reported strong first quarter results and the semiconductor business has improved since Philips first launched its bid, the sources noted. The acquisition is not expected to generate significant cost savings and job losses are expected to be minimal, according to the sources. VLSI has 2,200 employees. VLSI chairman and chief executive officer Alfred Stein is expected to remain with the company as VLSI is integrated into Philips, the sources said.