Cypress Semiconductor is trying to disrupt a deal announced last week that will see Dialog Semiconductor acquire Atmel, a US designer and manufacturer of microcontrollers, for $4.6 billion.

Cypress is working with investment bankers and has told Atmel its offer will be better than Dialog’s, according to a Reuters report, which added that “a merger with Atmel would be transformational for Cypress, which has a market capitalisation of just $2.9 billion.”

If Atmel did decide to go for the Cypress offer, it will have to pay Dialog a termination fee of $137.3 million, according to their agreement.

However, people familiar with the matter also said there is no guarantee that Cypress will be able to make an attractive enough offer.

None of the parties have made any official comment.

Last summer, Cypress attempted to acquire chipmaker Integrated Silicon Solution, but lost out to Uphill Investment which bought the company for over $700 million.

Cypress makes flash memory chips and microcontrollers and is looking to boost its Internet of Things (IoT) portfolio, the report said.

Cypress’ attempt to buy Atmel is part of a wider M&A trend in the semiconductor industry which is trying to keep up with demand for cheaper chips and clients looking to reduce their number of suppliers.

The Dialog-Atmel transaction is expected to close in the first quarter of 2016 subject to approval from regulatory authorities and shareholders.

If it does go through, it will result “in a fast growing and innovative powerhouse, supporting mobile power, IoT and automotive customers. The combined company will address a fast growing market opportunity of approximately $20 billion by 2019,” Dialog said, adding that it anticipates achieving projected annual cost savings of $150 million within two years.

However, its shares dropped 21 per cent since the deal was announced, with investors sceptical.

Companies similar to Atmel have proved attractive acquisition targets for larger players in the sector looking to enhance their capabilities around IoT, technology that allows devices, cars and watches to interact.

In May, semiconductor company Avago Technologies acquired rival Broadcom in a $37 billion deal.