Under the potential deal, Renesas would pay 67.50 euros a share for Frankfurt-listed Dialog, it said in a release to the Tokyo Stock Exchange, confirming an earlier statement from Dialog.
“Our statement does not represent any intention to go through with an acquisition,” Renesas said.
British financial regulations mean the Japanese chip maker must declare whether or not it will launch a bid by March 7.
The talks come after Renesas and Dialog deepened ties in August with an agreement to cooperate in automotive computing platforms as the Japanese firm looks to bolster its offerings amid growing demand for automotive chips.
A global shortage of semiconductors has forced some carmakers to curtail production plans.
Renesas, which has around a 30% global market share for microcontrollers used in cars, has been looking for ways to increase its share of analog chips used to process signals for things such as sound, light and temperature.
As part of that effort Renesas in 2018 agreed to buy U.S. chip design firm Device Technology Inc for $6.7 billion following the $3.2 billion purchase of U.S. chipmaker Intersil in 2017.
A cash offer of 67.50 euros per share for Dialog would represent a 20% premium to its closing stock price on Friday of 56.12 euros, when it had a market capitalisation of around 4.3 billion euros ($5.2 billion).
“A further announcement will be made as and when appropriate. There can be no certainty that any firm offer will be made for the Company, nor as to the terms on which any firm offer might be made,” Dialog said in its statement.
The Japanese company is due to release its earnings results for the three months ended Dec. 31 on Wednesday. Automotive chips account for around half its revenue. Its shares in Tokyo fell more than 5% in early trading.
Dialog last month gave an upbeat fourth-quarter revenue forecast due to strong demand for 5G phones and tablets.
($1 = 0.8304 euros) Reporting by Paul Carrel, Tim Kelly and Makiko Yamazaki; Editing by Maria Sheahan, Alexander Smith and Richard Pullin