Intel [NASDAQ:INTC] has tumbled 6.24% since June 1, closing on Thursday at $32.31, after Intel announced that the company will acquire Altera [NASDAQ:ALTR] for $16.7 billion in cash. Intel said in the statement, “The acquisition will couple Intel’s leading-edge products and manufacturing process with Altera’s leading field-programmable gate array (FPGA) technology.” According to Intel, it plans to fold in Altera as a business unit and to continue building Altera’s ARM-based and power management power product lines. 

It is not certain whether Altera will continue developing future chips based on ARM-chip architectures or switch to Intel architectures. ARM is a family of reduced instruction set computing (RISC) architectures developed by British company ARM Holdings [NASDAQ:ARMH], Intel’s biggest rival.

The news may not be a surprise as Intel has manufactured Altera FPGAs, on Intel’s 14 nm tri-gate transistor technology, in their foundry fab since February 2013. About five years ago, Intel established its Intel Custom Foundry (ICF) division within its Technology and Manufacturing Group (TMG) in order to directly compete with foundry companies like TSMC and Samsung [KRX:005930].

Thus far, Intel’s foundry business, which primarily offers 14-nm Intel manufacturing technology, has only six customers including Altera, Panasonic [TSE:6752], and other mid-size fabless companies. Intel did not say what will happen with their foundry business after Altera becomes part of Intel.

The Intel and Altera deal would be a perfect match, as Intel once said that the company has a plan to create a hybrid Xeon-FPGA chip that will plug into a single processor socket. It is highly critical for Intel as Google, Facebook, Baidu, and others are now using graphics processor unit (GPU) chips, originally built for rendering graphics, to power the latest in artificial intelligence tools, including speech recognition, image recognition, and natural language processing. In fact, FPGAs could be much better devices to use in datacenters for hardware acceleration than a GPU, as they consume less power.

Mark Hung, a Gartner semiconductor analyst, pointed out that another reason for Intel to acquire Altera was because of the rumors that Altera was going to use an Intel competitor for its next generation chips. Intel wants to prevent the embarrassment of losing a major customer, so buying the company solves that problem.

In the first-quarter ended March 2015, Altera reported total revenues of $435.5 million, down 6% year-over-year and net income of $94.9 million, or $0.31 per diluted share, compared with net income of $116.5 million, or $0.37 per diluted share, in the first quarter of 2014. Both revenues and earnings missed analysts’ expectations of $0.32 per share on revenues of $470.4 million.

Looking forward, Altera sees a sales decline of 4% to 8% in the second-quarter ending in June 2015, as they expect a drop in their telecom and wireless businesses, which account for about 42% of its total revenues. Altera is upbeat about its industrial automation, military and automotive businesses, but said the networking, computer and storage markets are to remain flat. Altera shares have been trading in the range between $38 and $30 since April 2012, before the acquisition news leaked.

Altera will report its second quarter 2015 earnings on July 22-27, if the Intel deal can’t be closed by then. Analysts are expecting earnings of $0.26 per share, down 36.6% year-over-year, on revenues of $409.56 million, down 16.7% year-over-year.

If the acquisition deal goes through, revenues for 2015 of the combined company could be about $57.18 billion, minus the foundry fee that Altera pays to Intel, estimated to be around $300 to $400 million. Hence, we may expect Intel's 2015 revenue growth to be 0.36% year-over-year. 

From our technical viewpoint, INTC broke out the rising wedge in June 2014 with a projected price of $34.71, determined by adding the width at the top of the pattern to the point of breakout. Intel shares reached the projected price in September 2014 and pulled back sharply. 

INTC has been trading in a symmetrical triangle chart pattern in the range between $34.71 and $29.10 since October 2014. The stock could pull back further as investors are skeptical about Intel’s future growth strategies. The next support levels are $31, $29.84, or the 23.6% Fibonacci retracement level, and $29.10. According to Yahoo Finance, the stock has a one-year price target of $34.64 per share. 

Intel will release its second-quarter 2015 earnings report on July 13-17. Wall Street is expecting revenues of $13.21 billion, down 4.5% year-on-year, and an EPS of $0.52 per share, down 5.5% year-on-year.

Disclosure: No Position in INTC or any other stocks mentioned.