Chi Mei is currently Taiwan's second-largest and the world's fourth-largest LCD manufacturer.

Innolux is an affiliate of Hon Hai Group, the world's largest contract electronics maker.

According to a stock swap deal reached between the two companies, every 2.05 Chi Mei shares will be exchanged for one Innolux share.

Innolux will be the surviving company and will be renamed Chimei Innolux Corp. after the merger.

Hon Hai Chairman Terry Gou said the new company may not immediately become the world's largest LCD manufacturer, but it will soon take the lead in Taiwan.

Gou said he expects the combination of Hon Hai's and Chi Mei's corporate resources to greatly upgrade the company's competitiveness, predicting that the company will rank within the world's top three within three years.

Chi Mei Group founder Shi Wen-long said the company had raised the possibility for a merger not only with Innolux, but also with AU Optronics -- Taiwan's largest and the world's third-largest LCD maker.

CMO finally chose to merge with Innolux, because it believes the combination will more effectively boost the international competitiveness of Taiwan's LCD industry, Shi said.

He predicted that Taiwan and South Korea will dominate the global LCD industry in the future.

At present, South Korean-based Samsung and LG Display remain the two largest LCD makers in the world.

(By Pan Chi-I and Y.F. Low)