TECHNOLOGY / MORE ON TECH : Stockholders Approve S3’s Purchase of Diamond Multimedia

Shareholders of S3 Inc., a Santa Clara, Calif.-based producer of multimedia accelerators for PCs, approved the company’s acquisition of San Jose-based Diamond Multimedia Systems, a struggling supplier of microprocessors for its products, for about $180 million in stock. The combined company will consolidate headquarters and other facilities. About 100 employees at the two firms have been laid off in preparation for the acquisition, said Kenneth Potashner, chief executive of S3.

Diamond has been losing money in the volatile market for graphics chips and lacked the capital to exploit new opportunities in home networking and Internet music products, said Brian Alger, an analyst with Preferred Capital Markets in San Francisco. Cash-rich S3 will build the Diamond brand and move aggressively in those areas, Potashner said. Alger praised the move, calling the merged company undervalued at a combined market capitalization of about $700 million, in part because S3 owns a stake in Taiwanese semiconductor giant UMC Group valued at more than $500 million. Shares in Diamond Multimedia closed down 19 cents at $4.75, and S3 fell 56 cents to $8.94, both on Nasdaq.