* Infineon says $40 per share offer for U.S. firm is all-cash
* Says deal to begin to boost Infineon earnings by end of 1st yr
* Says margin improvements will show up in second yr after closing (Changes dateline, byline, adds details of products and markets, profit margin impact on Infineon)
By Jens Hack and Maria Sheahan
MUNICH/FRANKFURT, Aug 20 (Reuters) - Merger-shy German chipmaker Infineon has agreed to buy California-based International Rectifier for about $3 billion in cash, Infineon said on Wednesday, in its biggest-ever acquisition.
Terms call for it to pay $40 per share for the U.S. company, a maker of power-management circuits used in everything from computers to appliances, automobiles, lighting and aircraft.
Shares of International Rectifier rose as high as $39.50 following the news. At 1800 GMT, the stock was trading at $39.06, a gain of $12.51 or 47 percent on the day on the New York Stock Exchange.
Infineon shares fell 1.72 percent in after-hours trade on the Frankfurt exchange. The stock had closed down 1.38 percent ahead of the announcement, while those of several possible targets, including International Rectifier rose, following reports that Infineon was preparing to buy a U.S. chipmaker.
Infineon, whose chips activate car airbags, enable cruise control, manage power supplies and cut vehicle emissions, has shunned major takeovers since it was spun off from engineering conglomerate Siemens in 1999.
It struggled in the subsequent years to turn a profit in its slumping memory-chip business, which it then disposed of.
Infineon said the merger would complement its own range of high-powered chips with International Rectifier's low-power, energy efficient chips. Infineon said its combined market share of the fragmented power semiconductor market would grow to 17.2 percent from 11.8 percent as a standalone company, based on 2012 revenue figures. Toshiba and Mitsubishi would have just 7 percent of the market on the same basis.
The merger will help the combined company cut operating costs and increase the utilisation of its heavy investment in 300 millimetre wafer production plants in Dresden and Villach, Austria. It will also boost Infineon's presence in U.S. and Asian markets outside Korea, where the company is already active, Infineon said.
PRESSURE FOR A DEAL
For months, shareholders have been calling on Chief Executive Reinhard Ploss, who has been at the helm since 2012, to use Infineon's cash pile of more than 2 billion euros ($2.7 billion) to make acquisitions, or return the money to investors.
On July 30, Infineon board member Arunjai Mittal told analysts the group would pick its target according to strategic fit, how difficult a post-merger integration would be and how much the buy would add to Infineon's sales and profit.
UBS analysts at the time interpreted his statement to imply that Infineon would look for a target that it could pay for largely with cash on hand, that has a high free float and an operating margin of at least the 15 percent it has targeted.
Infineon said it will fund the transaction using existing cash on hand and credit facilities of 1.5 billion euros, which have been fully underwritten by Bank of America Merrill Lynch and Citigroup, which acted as financial advisors to Infineon.
JPMorgan is acting as exclusive financial advisor to International Rectifier.
Kirkland & Ellis and Freshfields Bruckhaus Deringer are acting as counsel for Infineon and Fried, Frank, Harris, Shriver & Jacobson is acting as counsel for International Rectifier.
Infineon said the acquisition is expected to start boosting its reported earnings per share by the end of the fiscal year in which the deal closes. But it cautioned that Rectifier, which is in the middle of an existing cost restructuring programme, must continue to boost its profit margins from around 8 percent now.
By the second full fiscal year after closing the deal - sometime in 2017, Infineon said it expected that International Rectifier's profit margins would be "at least in line with" Infineon's projected multi-year margin targets of 15 percent.
The deal has been approved by International Rectifier's board and is expected to close late in 2014 or early in 2015, subject to regulatory approvals, Infineon said.
($1 = 0.7528 euro) (Writing by Eric Auchard in Vienna; Additional reporting by Alexander Hübner in Frankfurt, Joern Poltz in Munich, Victoria Bryan in Berlin and Supantha Mukherjee in Bangalore; Editing by Victoria Bryan, Pravin Char and David Evans)