Verigy (Nasdaq: VRGY), which manufactures semiconductor test solutions, recently terminated its $424 million deal to buy LTX-Credence (Nasdaq: LTXC), instead agreeing to sell itself to Japan's Advantest (NYSE: ATE) for $1.1 billion. But is this new relationship better than its old one?

A fair comparison
In late March, Advantest announced that it had agreed to acquire Verigy for $15 per share in cash, topping its initial $12.15 offer. Although Verigy saw merit in Advantest's offer, the deal itself helped Verigy avoid a path that would pitch it directly against Teradyne (NYSE: TER). Teradyne has carved a niche for itself in the lucrative market for testers of components widely included in smartphones, and Verigy with its comparatively limited resources felt that combining itself with Advantest would help it better tap that market.

Singapore-based Verigy has been looking for new ways to expand market share and better compete against larger Teradyne. Semiconductor devices or integrated circuits are the fundamental building blocks used in all electronic systems. Designing and manufacturing semiconductor devices are complex and capital-intensive processes. Semiconductor test equipment that companies like Verigy manufacture play a critical role in this complicated system.

Justifying the betrayal
MKM Partners research suggests that the Advantest-Verigy duo can give a bull fight to its larger competitor Teradyne by taking control of nearly 48% of the global chip-testing market, more than the 40% Teradyne controls. Although Advantest has the largest installed base at Intel (Nasdaq: INTC), it's still a smaller player in the digital/logic Automated Test Equipment market. Acquiring Verigy would help Advantest expand its digital/logic ATE efforts as Verigy has a strong hold in that segment.

Reasons to cheer
Advantest is aware of Verigy's strength in the non-memory semiconductor test systems, and its move to buy Verigy could be part of a greater strategic play. The combined entity will have a wider product line by combining Advantest's strength in memory products and scale with Verigy's non-memory specialties. Smartphone fields like system-on-chip testers are growing rapidly, and Verigy gives Advantest additional expertise and products in these areas.

Moreover, the combined company can simultaneously prune costs in this competitive market as it strengthens its R&D department. Given Verigy's technical talent and technological development capabilities, this will give the merged entity more firepower. It also gives the combined entities a broader foothold -- and an ability to tap those markets that include Japan, Asia, the U.S., and Europe. On its own, Advantest may have continued to struggle against larger competitors like Teradyne or even Advantest itself, so an acquisition makes sense for both companies.

Foolish outlook
Historically, the semiconductor industry has been highly cyclical and has witnessed recurring periods of tepid product demand. So seeing a buyout boom that could signal some sort of peak is always an area of concern. However, Haruo Matsuno, Advantest's chief executive, believes that the combined companies can better service their customers in both system-on-chip and memory markets, which will enable them to be the global leader in these fields. Let's wait and watch as to how the companies nurture this relationship going forward.

Bibhudutta Subhasish does not own shares of any of the companies mentioned in this article. Intel is a Motley Fool Inside Value pick. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a diagonal call position on Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.