Innolux Display Corp. (3481.TW) plans to acquire Toppoly Optoelectronics Corp. (3195.OT), a small maker of flat panels used in handsets, in a share swap valued at NT$20 billion (US$620 million) to expand into the production of small-to-medium-sized panels.

Innolux, which is about 24%-owned by Foxconn Group, the world's largest contract electronics manufacturer, said it plans to finance the deal by swapping each of its shares for every eight Toppoly shares.

"The acquisition will allow the company to make more efficient use of its funds, talents and technologies," Tuan Hsing Chien, chairman of Innolux, a flat-panel computer-monitor maker, said in a statement.

Toppoly is 28.5%-owned by Compal Electronics Inc. (2324.TW), the world's second-largest contract notebook maker by revenue after Quanta Computer Inc.

The deal will help Innolux diversify amid falling prices for computer monitors, and boost its share of the world's small- to medium-sized liquid-crystal-display market to 15%-20%, said Tuan. This would be up from 5%-8% currently.

"We want to go in the direction of making small, medium panels for handsets...in the future, this will allow us to give our customers better support," said Tuan.

Innolux expects to ship around 250 million to 300 million small and medium-sized panels next year, Tuan said. It ships around 10 million small and medium-sized panels a month currently, said Tony Chen, an investor-relations official.

Toppoly's 3.5 generation plant currently makes 70,000 panels a month, while Innolux's 4.5 generation plant produces 50,000 panels a month, Toppoly's Chairman Ray Chen said.

"We hope that after this acquisition, Toppoly's customers and their orders will be transferred to Innolux," said Chen.

Toppoly counts Nokia Corp. and Motorola Inc. as its major customers.

Innolux posted a second-quarter net loss of NT$1.44 billion, reversing from a net profit of NT$3.46 billion a year earlier. Unlisted Toppoly had a net loss of NT$1.98 billion in the first half, wider than a net loss of NT$1.24 billion a year earlier.

Toppoly hasn't been profitable since it was set up in June 2006.

Compal's shares ended 2.5% higher at NT$39.10 before the two companies announced details of the deal. Innolux's shares ended 0.9% higher at NT$41. That compares with Taiwan's benchmark stock index which closed 0.4% higher.

-By Charmian Kok and Alex Pevzner, Dow Jones Newswires; 8862-2502-2557; alex.pevzner@dowjones.com

(Perris Lee Choon Siong contributed to this article.)