UPDATE 2-Microchip to buy Silicon Storage for $273 mln

* To buy Silicon Storage for $2.85/shr, a 6 pct premium

* Q3 EPS of 37 cents beat estimates by 8 cents

* Sees Q4 sales of $257.5-$267.5 mln vs $247.9 mln est (Adds analyst comments, details and updates share movement)

By Shrutika Verma

BANGALORE Feb 3 (Reuters) - Semiconductor company Microchip Technology Inc (MCHP.O) said it would buy Silicon Storage Technology SSTI.O for about $273 million, topping an earlier offer to acquire the flash chip maker.

The $2.85 a share offer, 6 percent more than Silicon Storage's closing price on Tuesday, trumps the previous offer of $2.10 a share from Technology Resource Holdings in November.

Silicon Storage said it has terminated its merger agreement with Technology Resource before entering into an agreement with Microchip.

The deal gives Microchip access to Silicion Storage's flash chip technology and patent portfolio, both key building blocks for advanced microcontrollers, Steve Sanghi, Microchip's chief executive said in a statement.

The deal, expected to close in the second quarter of 2010, comes in the wake of increased takeover chatter in the U.S. semiconductor sector as markets begin to stabilize and the industry emerges from its two-year long slump. [ID:nSGE5BR078]

Silicon Storage's chips are used in a wide array of consumer electronics products such as PCs, digital still cameras and MP3 players and its customers include Apple (AAPL.O), Cisco (CSCO.O), Dell (DELL.O) and IBM (IBM.N).

Microchip and a lot of its competitors use Silicon Storage's technology and that's really the reason why it is buying this company... they would not have to pay Silicon Storage a licensing fee in the future, said Morgan Keegan & Co analyst Harsh Kumar.

"It is a very high gross margin business that they are acquiring so we think this is a hell of a deal for Microchip," he added.

Shares of Microchip were up 1 percent to $26.72, while those of Silicon Storage were up 6 percent to $2.84 Wednesday on Nasdaq.

Q3 BEATS STREET

Microchip, which reported better-than-expected quarterly results, said it had over $1 billion in cash and short-term investments as of December 31, 2009.

The company forecast fourth-quarter earnings of 33 cents to 36 cents a share, on revenue of $257.5 million to $267.5 million.

Excluding items, the company expects earnings of 39 cents to 41 cents a share. [ID:nWNAB2212]

Analysts were looking for earnings of 30 cents a share, excluding items, on revenue of $247.9 million, according to Thomson Reuters I/B/E/S.

For the latest quarter, net income fell to $69.4 million, or 37 cents per share, from $72.4 million, or 39 cents per share, a year earlier. Revenue rose 30 percent to $250.1 million.

Analysts on an average were expecting earnings of 29 cents a share, excluding exceptional items, on revenue of $243 million, according to Thomson Reuters I/B/E/S. (Reporting by Shrutika Verma in Bangalore; Editing by Vikram S Subhedar and Saumyadeb Chakrabarty)