updated 7/31/2006 10:35:18 AM ET 2006-07-31T14:35:18

Flash memory maker SanDisk Corp. said Monday it agreed to acquire Israeli competitor M-Systems Flash Disk Pioneers Ltd., in an all-stock deal that values M-Systems at $36 per share, a 26 percent premium over the average closing price of M-Systems' shares over the last month.

The transaction, expected to close in the fourth quarter, is subject to several factors including Israeli court and regulatory approval. The total value of the transaction is roughly $1.35 billion.

Rumors began surfacing of a possible deal last week, when Israeli media reported that SanDisk offered to buy M-Systems for $1.5 billion.

M-Systems is one at least 61 companies under review by the Securities and Exchange Commission or the Department of Justice for allegedly backdating stock option grants to coincide with share lows to boost executive profits. There are at least another 18 companies conducting internal reviews of their stock option grant practices.

As of March 31, M-Systems had 37.6 million shares outstanding, excluding an offering of 8.7 million shares that was delayed due to the stock-option grants probe.

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