In a move that may very well have saved the assets of a once-venerable US media chip producer from being auctioned off, graphics chip maker nVidia announced this morning it is acquiring San Jose-based PortalPlayer, a producer of embedded media processing chips for devices such as SanDisk's Sansa MP3 player, in a stock purchase plan totaling $357 million.

PortalPlayer had been struggling to regain its footing as a producer of multimedia processing chips after the customer that essentially put it on the map, Apple, dropped it last April without much warning as its key supplier for its video iPod. Up to that point, Apple had reportedly accounted for 95% of PortalPlayer's business. Its replacement was Samsung, which apparently offered Apple a discount on flash memory to sweeten the deal; PortalPlayer is not a flash producer.

The PortalPlayer design has actually been considered quite innovative, and worthy of its presence in the iPod, were it not for Samsung's package deal. Prior to winning the Apple contract, Samsung executives had publicly dubbed their proposed replacement "the PortalPlayer killer."

Despite rumors of the company's imminent death, PortalPlayer did manage, against all odds, to remain in the black. Two weeks ago, it reported net income for its fiscal third quarter 2006 at $1.5 million, up $100,000 from the previous quarter. That blank ink came at a cost, however: the layoff of 14% of its workforce in June, and the scaling back of operations and expectations.

As part of its comeback plan, PortalPlayer had staked a name for itself in a burgeoning new market for embedded components: secondary, miniature LCD displays for notebook computers. Its design, called Preface, consists of low-power displays on the outside of the clamshell, that can remain switched on even while the rest of computer is on standby. These displays can register the time, check the current box scores, present the weather forecast, and even show recent e-mails. Microsoft has vowed to support the concept behind this technology in its upcoming Windows Vista.

Preface could be a lucrative new technology for nVidia, which now knows it's going up directly against AMD -- no longer just ATI -- in the production of new platform technologies for notebook computers.

There may be new momentum behind nVidia's move. A recently released Merrill Lynch analyst's report projects that, in its last fiscal quarter, the company's market share in the entire graphics chip market increased a staggering eight points, to 29%.

Its share of the integrated chip market alone, the report also states, leap-frogged in size over that of its nearest competitor, Intel, although embedded graphics is generally known to be a low-margin business.

Yet the news of today's acquisition does throw cold water on rumors that nVidia is seeking to be acquired by Intel. With an integrated graphics chipset business of its own, Intel doesn't need nVidia the way AMD needed ATI. Meanwhile, with Intel also firmly positioned as a provider of embedded chipsets as well, it needs PortalPlayer even less.