Dialog Semiconductor PLC announced a $4.6 billion cash-and-stock deal to buy Atmel Corp., the latest sign that chip makers are betting on a technology trend called the Internet of Things.

Dialog, a U.K.-based company, sells chips used to manage power in high-end smartphones from Apple Inc. and others. Atmel, based in San Jose, Calif., is best known for chips called microcontrollers that provide computing power for many kinds of consumer and business hardware.

Jalal Bagherli, Dialog's chief executive, said the deal will help the company reduce its dependence on a few smartphone makers. At the same time, he said, acquiring Atmel's customer base and line of products will make Dialog a major player in chips for connected cars, wearable devices and other networked gadgets lumped under the catchall phrase Internet of Things, or IoT.

Atmel had signaled it might be considering a sale on Aug. 24, when the company said it was extending the retirement date of Chief Executive Steven Laub through the completion of a strategic review process. Mr. Laub, who had led the company since 2006, had said in May that he would retire on Aug. 31.

Investment banker Qatalyst Partners led a sale process that apparently attracted multiple bidders.

"We won the second round of bidding," Mr. Bagherli said.

The transaction continues a string of combinations in the semiconductor business, where stock prices have been held down by slowing growth and companies see advantages in merging product lines and sales forces.

In the biggest such transaction, Avago Technologies Ltd. in May agreed to buy Broadcom Corp. for $37 billion. Intel Corp. followed with a $16.7 billion deal to buy Altera Corp.

Dialog, based near London in Reading, traces its lineage to 1981 and the European operations of a U.S. company called International Microelectronic Products Inc. Those operations were acquired by auto maker Daimler-Benz AG and later spun out, with Dialog going public on the Frankfurt exchange in 1999.

Atmel, founded in 1984, gets about 70% of its revenue from microcontrollers. The chips are used in applications that include smartwatches, fitness devices and circuit boards for electronics tinkerers known by the name Arduino. It also sells chips to help manage sensors and touch screens in smartphones and tablets.

Mr. Bagherli said Atmel has also developed technology to provide security for Internet of Things applications. "That is very, very key for IoT," he said.

In the transaction, Atmel shareholders would receive $4.65 in cash and 0.112 of a Dialog American depositary share for each Atmel common share, or the equivalent of $10.42, Dialog said, based on Dialog's closing price on Friday.

That price represents a 43% premium to Atmel's closing price Friday, when it traded at $7.27 a share, off 2.2%.

The combined company would have $2.7 billion in annual sales, Dialog said. Atmel actually has more employees than its acquirer--5,000 to about 1,500, Mr. Bagherli estimated--which he attributed to Atmel operating factories to manufacture some of its chips. Dialog had relied entirely on external manufacturing services.

Dialog expects the transaction to result in annual savings of $150 million within two years. The company will fund the takeover with existing cash, new debt and shares. Both companies' boards of directors have approved the transaction, which is expected to close in the first quarter of 2016, Dialog said.

Sarah Sloat contributed to this article

Write to Don Clark at don.clark@wsj.com and Robert Wall at robert.wall@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires