Arm is to pay $910m (£504m) in cash and shares for Artisan, the US-based transistor-level designer for systems-on-a-chip.
Arm chairman Sir Robin Saxby said in a conference call: "This will be a combination of the two leading silicon IP (intellectual property), cash-generating and profitable companies."
He added that the companies were complementary, with almost no overlap of customers or products. Artisan designs at the physical level and sells its designs to chip foundries. Arm designs chips and provides some of the software to go with them.
Both companies emphasise the strength of their IP, with its royalties giving them both operating profit margins of over 20 per cent.
Arm chief executive Warren East said: "As system design complexity increases in deeper sub-micron technologies, so does the need for stronger links between all aspects of SoC (systems-on-a-chip) development, from library elements to advanced microprocessor IP and software."
Arm will stump up $225m in cash out of its reserves and toss in Arm shares to make up the full price. Artisan shareholders can take a choice of cash or shares. Artisan chairman Lucio Lanza and president and chief executive Mark Templeton will join the Arm board, while East will be chief executive of the combined companies.
For its money, Arm will be getting 340 employees and design centres in California and Bangalore. Artisan made a profit of $17.3m on a turnover of $82.9m in the 12 months to 30 June and has net assets of $205m, $140m of this in cash.
East said that his aim was to have Arm technology in every digital device. The two companies have both made their reputations by elegant designs that give energy-efficient computing power at low cost.
In the 12 months to 30 June, Arm made $51.3m profit on $235m turnover.