UPDATE 2-Austrian chipmaker AMS in talks to buy Germany's Dialog
* Firms say talks in "very preliminary" stage
* Combined company will have about $1.4 bln annual sales
* Could better tap market for web-connected devices
* Dialog shares up 3.7 pct, AMS shares down 1 pct (Adds sources, analysts, background)
FRANKFURT, June 26 (Reuters) - Austria's AMS is in talks to buy German peer Dialog Semiconductor to create a European chipmaker with a market value of about $4.7 billion that could better tap the growing market for web-connected devices.
AMS makes electronic sensors, which can measure everything from air pollution to the human heartbeat, while Dialog's chips manage power consumption. Both firms supply chips to Apple for iPhones and iPads.
Together they would have annual sales of about $1.4 billion, but the firms said on Thursday in a joint statement that discussions were at a "very preliminary stage".
Analysts said a combined company could create products to more effectively exploit the burgeoning market for smart devices dubbed the Internet of Things (IoT). Such devices include web-connected refrigerators, gadgets that track cars and trucks in real time - potentially useful for the insurance industry - and wearable tech that allows doctors to monitor patients remotely.
"The combination of Dialog's connectivity and power management products and AMS' broad sensor portfolio would create a strong player for the IoT opportunity," said analyst Guenther Hollfelder at Helvea Baader Bank.
Researchers at IDC said earlier this month the worldwide market for IoT products and services would grow from $1.9 trillion in 2013 to $7.1 trillion in 2020.
The talks between AMS and Dialog come amid a flurry of deals among chipmakers as they are looking for alternatives to saturated mobile phone markets.
Earlier this month, Analog Devices Inc said it would buy Hittite Microwave Corp in a deal valued at $2 billion and Cirrus Logic Inc said it would buy Wolfson Microelectronics Plc for an agreed 291 million pounds ($489 million) in cash.
Combining AMS and Dialog would also deliver significant costs savings, according to people familiar with the talks between the two firms.
"The businesses are largely complementary, it is not a transaction driven by head-count reduction," said one of the sources.
Analysts say the companies could save on development costs and negotiate better prices at major chip foundries such as UMC and TSMC.
AMS and Dialog declined to comment beyond their statement confirming they were in talks.
Analysts estimate about 70 percent of Dialog's roughly $900 million annual revenue came from Apple in 2013, which some say makes the firm too dependent on a single customer. Apple is also AMS' biggest customer, accounting for a quarter of its revenue of about $500 million last year, analysts say.
Shares in Dialog, which have gained almost 70 percent so far this year, were up 3.7 percent by 1304 GMT. That gives it a market value of about 1.8 billion euros ($2.5 billion).
AMS shares were down 1 percent, valuing the company at about 2 billion Swiss francs ($2.2 billion).
AMS is unlikely to pay a large premium as the two firms view the transaction as a merger of equals, which will also result in an even split of the top jobs, the sources said.
AMS and Dialog said that under takeover rules Switzerland-listed AMS must by July 24 either announce a firm intention to make an offer for Dialog or announce that it does not intend to do so.
($1 = 0.7335 Euros; $1 = 0.8921 Swiss Francs) (Reporting by Harro ten Wolde and Arno Schuetze; Editing by Pravin Char)