* Deal is for C$3.98/share vs earlier C$3.35 hostile offer
* Bid valued at $632 million, including Zarlink cash
* Zarlink shares up 14 percent to C$3.94 (Adds analyst's comments; in U.S. dollars unless noted)
Sept 22 (Reuters) - Microsemi Corp (MSCC.O) has reached a friendly agreement to buy Canadian specialty chipmaker Zarlink Semiconductor Inc ZL.TO, ending a hostile standoff with a sweetened deal worth $632 million that will bolster Microsemi's medical technology product portfolio.
California-based Microsemi, which had courted Zarlink since January, said it will pay C$3.98 for each Zarlink share, or 19 percent more than its earlier C$3.35 bid, which Zarlink had rejected.
The total transaction value is $525 million, net of Zarlink's cash of $107 million, Microsemi said.
After the announcement, Zarlink shares jumped 14 percent at the market open to C$3.94. The stock had hit a one-year low of C$1.55 last November, and in March 2009 it was worth just 21 Canadian cents.
Ottawa-based Zarlink designs mixed-signal chip technology for communications and medical applications, a sector that is widely viewed as poised for strong growth in an otherwise largely consolidated semiconductor industry.
The deal helps Microsemi diversify its revenue stream, almost 40 percent of which comes from the defense market, said Tore Svanberg, an analyst at Stifel Nicolaus & Co.
"There is a lot of nervousness about defense budgets and things like that, so longer term, I think Microsemi is just trying to be prudent," he said.
Several industry giants are either involved in or entering the medical device technology area, including Intel (INTC.O), Texas Instruments TXN.N, Qualcomm (QCOM.O) and Integrated Device Technology (IDTI.O).
"I expected a higher bid, I just expected it to come from somebody else," said BMO Capital Markets analyst Brian Piccioni.
Before reaching the friendly deal with Microsemi, Zarlink said it had talked to at least 15 other potential suitors interested in buying the company in its entirety or in part.
But Zarlink never said which companies it was talking to, and Microsemi had not been expected to raise its bid unless another, higher offer surfaced.
"Entering the process and performing diligence enabled us to confirm the compelling strategic fit between the two companies," Microsemi Chief Executive Jim Peterson said in announcing the deal on Thursday.
Under the terms of the deal, Microsemi agreed to pay C$1,624.49 per C$1,000 principal amount of debentures, also a 19 percent increase over an earlier offer.
Zarlink was not available for immediate comment.
"I think that most shareholders will be quite pleased with the turn of events," Piccioni said.
($1=$1.03 Canadian) (Reporting by John McCrank and Pav Jordan in Toronto; Editing by Frank McGurty and Peter Galloway)