Intel will buy German chipmaker Infineon's wireless unit for $1.4 billion (900 million pounds), enabling the U.S. chipmaker to boost its presence in the smartphone market.

The cash transaction is expected to close in the first quarter of 2011 and the mobile unit will remain as a standalone business, the companies said in a statement on Monday.

Three people familiar with the matter had told Reuters on Friday that Intel and Infineon would likely reach an agreement on the business's future within the next few days.

This is the second major deal for Intel within two weeks after the company announced its $7.7 billion offer for McAfee Inc on Aug 19, its largest acquisition, bolstering the appeal of its chips as it tries to expand further into the mobile market.

Intel's Atom mobile chips took the low-cost, no-frills netbook market by storm but are rarely found in smartphones where other chipmakers dominate.

Infineon would make Intel an instant heavyweight (in the mobile space) and buy them three, four years in R&D, IDC analyst Flint Pulskamp has said.

But analysts also caution that while an acquisition such as Infineon's mobile chip unit is a step in the right direction it will take time to produce results.

Meanwhile, rivals based on UK-listed ARM's chip design -- which is said to be more power-efficient than Intel's offerings -- continue to grab market share.

Infineon shares fell 1.4 percent to 4.54 euros by 0812 GMT in Frankfurt, widening losses they posted on Friday after Intel warned its third-quarter revenue would fall short of its own expectations due to weak consumer demand on personal computers.

The positive effects of the (mobile chip) transaction have already been priced in. The sale has been discussed for months, said German market analyst Heino Ruland of Ruland Research.

Intel shares closed largely flat at Friday's market close in New York at $18.37.

SPECIAL DIVIDEND FOR INFINEON?

The deal will allow Infineon to focus on its core segments -- automotive, industrial and chip card security.

The sale of WLS is a strategic decision to enhance Infineon's value, said Chief Executive Peter Bauer said.

We can now fully concentrate our resources towards strong growth in our core segments.

Bauer, who took the helm in mid-2008, turned around the mobile chip unit after years of losses. It now generates around 30 percent of Infineon's total revenue but it ranks No. 5 in the chipset industry, far behind sector giants Qualcomm , Texas Instruments and Broadcom .

Based in Neubiberg near Munich, Infineon supplies chips to top manufacturers such as Nokia , LG <003550.KS> and Apple .

Asset sales may also open the door for a special dividend for Infineon shareholders, who have not seen a payout in years.

M&A MANIA

The deal comes amid a flurry of M&A activity worldwide as companies struggle to boost revenue in an anaemic economic environment.

According to Thomson Reuters data, nearly $200 billion in mergers and acquisitions has been announced in August, already making it the third-best month so far this year in terms of money committed to deals.

The top bids include BHP Billiton's $39 billion hostile offer for Canada's Potash Corp

and Vedanta Resources' $9.6 billion stake purchase in Cairn India .

In addition, Hewlett Packard and Dell Inc are embroiled in a bidding war for 3PAR Inc

with HP's latest bid of $2 billion currently trumping Dell's offer.

(Additional reporting by Noel Randewich; Editing by Mike Nesbit)

($1=.7861 euros)

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