Level One soared 72.58 percent or 19.69 points, to 46.81 in morning trading. The stock has traded as high as 44.38 and as low as 15 during the past 52 weeks.
The acquisition--Intel's largest ever and the first time the company has agreed to a stock-only transaction--marks a significant push into the fast-growing networking market, where the Santa Clara, California, company said it will now become a leading component supplier.
"We're continuing to look for other acquisition candidates," said Intel chief executive Craig Barrett. "We are deadly serious about our networking communications group."
Barrett's interest in the sector is easy to understand. In the next three years, sales of communications chips are expected to rise twice as fast as sales of microprocessors, which provide most of Intel's revenue, according to market researcher Dataquest. Networking sector products now contribute less than 10 percent of the company's $26 billion in annual revenue.
Each share of Level One stock will be exchanged for 0.43 shares of Intel stock. That values Level One at $48.75 a share, an 80 percent premium to today's closing price of 27.125. Intel will issue a total of 18.6 million shares for the purchase.
Level One's chips contain built-in communications features, used by network-equipment makers such as 3Com, Cisco, and Hewlett-Packard to save costs by reducing the parts in their gear. Currently, Intel isn't much of a force in that market.
The merger "provides us with the silicon building blocks necessary to supply the rapidly growing demands created by the Internet and e-commerce," Barrett said.
"With the core PC market slowing, they need to look for other growth opportunities," said analyst Ashok Kumar of Piper Jaffray Securities, who rates Intel a "strong buy."
Intel is facing pricing pressures at the low end of the x86 processor market from Advanced Micro Devices. Today's move will help insulate Intel's profit margins from the volatile market for PC chips.
The transaction is expected to be completed by the end of the second quarter, at which time Level One will become a wholly-owned subsidiary of Intel. Level One's 800 employees will be transferred to this subsidiary, and Level One chief executive Robert Pepper will join Intel as vice president of the company's network communications group and general manager of the Level One Components Division.
Level One generated 1998 revenues of $263 million. The company is a "fabless" semiconductor company, meaning that it does not manufacture its own chip designs, but contracts them out to other companies. That manufacturing strategy will reportedly stay in place after the deal is completed.
The deal is subject to regulatory and shareholder approval. Currently, Intel is under investigation by the Federal Trade Commission for illegally forcing some computer companies to license their technology or lose access to crucial Intel products and product information. The actions threatened both current and future competition to Intel's position in the desktop processor market, the government has alleged.
Bloomberg and Reuters contributed to this report.