Silicon Valley-based photovoltaic solar cell darling SunPower (NASDAQ: SPWR) is to buy privately-held PowerLight, North America's leading solar installer by market volume, and one of SunPower's biggest customers.

And while the market has so far reacted with largely only a yawn, sending SunPower only up 1.7% at press time, the industry is abuzz with what the deal means for solar.

Observers thought the deal made sense, especially if viewed long-term. "You need to look at this transaction through the lens of the solar module shortage going away in a year or so. How does SunPower stay a dominant player when the market returns to price, distribution and technology?" asked Barry Cinnamon, president of installer Akeena Solar (OTCBB: AKNS).

And while there are many examples of vertical integration failing, Cinnamon thought this deal had a good chance of succeeding. "Both companies are well run, aggressive California companies. I'm good friends with the top executives at both. They're very capable and professional teams, and their headquarters are only 30-40 miles away. This could erect barriers to entry from overseas module companies."

(Gee - could he mean Sharp, the Japanese-based leading solar cell manufacturer? Calls to Sharp USA went unanswered by deadline.)

Sanyo, itself a developer of solar cells and modules, wouldn't comment officially, but a spokesperson admitted the deal was "huge", and "significant for the industry."

Bill Rever, strategic marketing manager for BP Solar, acknowledged that the move meant his company would soon have a stronger competitor, and called the matchup "good", given that the two companies have both been positioning themselves as premium suppliers. But he warned the two have been dealing with each others' competitors, and "they're going to have to figure out how to deal with that."

Michael Rogol, managing director of Photon Consulting, was cautiously optimistic about the deal. "In general I'm skeptical of acquisitions. But in this space, there's so much easy opportunity for improvement in the product itself - it's such a bad product today, so hard to purchase, with such poor financing - that there's lots of room for improvement. And PowerLight is already one of the better companies in this space."

PowerLight is one of the leading installers of solar PV systems in the world. It installs residential and commercial systems across the U.S., as well as in Germany, Spain, Portugal, Italy, and Korea. PowerLight also develops and operates solar electric power plants (see PowerLight breaks ground on a 20 MW photovoltaic project in Spain), including two of the world's largest solar electric power plants, and has developed unique solar technologies complementary to SunPower's. The company is based in Berkeley, California - just across the San Francisco bay from SunPower.

The deal is valued at $332.5 million (U.S.) - $130 million in cash and another $202.5 million in SunPower shares at current value. The combined company would have about 1,600 employees spread across 10 global sales offices and four manufacturing facilities.

In a conference call this morning, SunPower said the acquisition was motivated by opportunities to extend its leadership in key applications and markets, to apply its technology leadership across the value chain, to accelerate product innovation to drive channel efficiency and to radically simplify and improve customers' experiences.

"What they're really getting at is ultimately reducing the cost in cents per kilowatt hour to the end customer, making solar power easier, cheaper, more efficient and more readily available," suggested Photon Consulting's Rogol.

The transaction is subject to approval by PowerLight's shareholders and regulators, and is expected to be closed by the first quarter of 2007.

SunPower is a leading manufacturer of photovoltaic solar cells and panels. The company is a majority-owned subsidiary of Cypress Semiconductor. In addition to its installation services, PowerLight has developed a flat roof solar module system and proprietary tracking system, as well as new solar residential roofing tiles.