British chip designer ARM Holdings Plc's shares rose as much as 5.7 percent after Bloomberg reported on Thursday that Google Inc may use ARM's technology to design its own server processors.
A deal would speed up ARM's push into the server market, where it has been a late entrant.
ARM's chief executive, Simon Segars, said in March after taking the helm that he saw big opportunities in servers, an area where the company was just getting started.
ARM licenses its designs to chipmakers such as Qualcomm and Texas Instruments, whose chips are used in Apple Inc's iPhone and Samsung Electronic Co's Galaxy devices.
ARM, which receives royalty on the sale of every chip that uses its technology, declined to comment on the report.
Jefferies analyst Lee Simpson said he expected companies such as Amazon and Facebook, which maintain large server farms, to adopt ARM's designs over the next couple of years.
ARM's strength in designing low-power processors has enabled it to dominate the mobile devices sector, while Intel Corp is by far the leader in chips used in servers and personal computers.
A deal between ARM and Google could dent Intel's dominance in the server market as Google is one of the biggest buyers of server chips.
"Since ARM chips for servers are cheaper, consume less power and require lower cooling compared with Intel chips, they would be very attractive for Google," Charles Stanley analyst Tom Gidley-Kitchin told Reuters.
Intel's shares fell as much as 1.5 percent in early trading on Friday on the Nasdaq.
Gidley-Kitchin also said Google could be using the deal to pressure Intel to reduce prices of its low-power chips.
For Google, a deal could result in massive savings and help it manage its servers better.
Google, which contributes about 5 percent to Intel's sales, could better manage the interactions between hardware and software if it used its own designs, Bloomberg said, citing a source with direct knowledge of the matter. (link.reuters.com/gaq45v)
"We are actively engaged in designing the world's best infrastructure. This includes both hardware design (at all levels) and software design," Google said in an emailed comment to Reuters.
Some analysts said fears that Intel could lose a chunk of its market share were overblown.
"We believe that ARM based server products will predominantly cater to hyperscale workloads and capture just 10 percent of overall server units by 2018," FBR Capital Markets analyst Christopher Rolland said in a note.
ARM's shares closed up 3 percent at 1003 pence on on Friday the London Stock Exchange. The company's U.S.-listed shares were up 3.4 percent at $49.27 by midday on the Nasdaq.
(Additional reporting by Chandni Doulatramani in Bangalore; Editing by Saumyadeb Chakrabarty)