ON Semiconductor is exploring a potential acquisition of Allegro MicroSystems, it emerged on Monday, as the chip sector looked to consolidate amid an uncertain demand outlook.

According to Bloomberg, the Arizona-based chipmaker had been working with advisers in recent months to assess a deal, though it was unclear whether Allegro was open to a sale.

Bloomberg cited its source as saying other potential bidders could also emerge.

New Hampshire-based Allegro specialises in power and sensing semiconductors used in automotive, industrial and cloud-computing applications.

ON Semiconductor operates in a similar space, developing technologies for power management and motion control.

The speculation drove Allegro’s shares up as much as 12% in premarket trading in New York on Monday.

The company, which Bloomberg said had gained 2% this year through to the end of February, has a market value of $4.1bn.

ON Semiconductor, down 25% over the same period, was meanwhile valued at about $19.8bn.

The potential takeover discussions came on the heels of Allegro announcing a leadership change.

Last week, the company appointed longtime executive Mike Doogue as its new chief executive officer, replacing Vineet Nargolwala.

At 1003 GMT, shares in Allegro MicroSystems were up 18.74% in New York at $26.48.

Reporting by Josh White for Sharecast.com.