The merge of the companies will help develop improved microchips.

Intel Corp on Monday agreed to acquire Altera, the manufacturer of programmable chips, in a $16.7 billion deal which is the largest in its history.

Altera shareholders will receive $54 a share in cash, a premium of about 10.5 percent above Altera’s close on Friday.

It’s believed a harsher race amongst major chip manufacturing industries has been implied by the huge premium paid by Intel in the industries third multibillion-dollar semiconductor deal since March. Singapore’s Avago bought US’s Broadcom for $37 billion last week in the largest deal in the technology sector since the late 1990s dotcom bubble. Dutch NXP semiconductors also bought the US’s Freescale in a $12 billion deal in early March.

With Altera, Intel will be able to incorporate processing chips with programmable chips used to speed up web-searches and also help its move towards the Internet of Things – the concept of connecting ordinary household devices to the internet. Altera was founded three decades ago and employs roughly 3,000 people in 19 countries.

Altera makes chips used in a range of telecom and wireless equipment as well as military, automotive, industrial and networking hardware applications, with huge clients such as Huawei of China and Ericsson of Sweden.

“Intel’s growth strategy is to expand our core assets into profitable, complementary market segments. With this acquisition, we will harness the power of Moore’s Law to make the next generation of solutions not just better, but able to do more”, said Brian Krzanich, Intel’s chief executive. Gordon Moore, Intel’s co-founder, had observed that the processing power of chips doubles every two years.

Semiconductor groups empowering smartphones are increasingly under constraints to fine tune costs as they face tough competition from handset makers such as Apple and Samsung with strong pricing abilities. Thus they hope that the merger will strengthen the company allowing it to stand up to larger groups in regards to pricing and also cutting costs by operating under one roof helping them grow faster, says analysts.

Altera’s chips integrated with Intel’s will bring forth new chips of significant improvement in performance, lower costs and a lot more flexibility, Intel Chief Financial Officer Stacy Smith reportedly said. “That’s the piece that’s pretty exciting about it”. Intel looked at other targets, but Altera was the best bet to create value for the shareholders, added Smith.

Programmable chips will increase the computational capability of Intel’s Xeon server chips, which is likely being challenged post the Avago-Broadcom merger.

It is believed that the Altera’s programmable chips, extensively used in data networking equipment, will “strengthen Intel’s presence in the data centre market”, with improvements in high-performance tasks such as web searches. Intel already makes some of Altera’s products as the company focuses more on designing chips rather than manufacturing them and the deal would allow Intel to further these efforts.

Altera’s shares rose 6 percent to $51.79 shortly after midday on Monday as the market reacted positively to a deal while Intel’s shares were broadly flat- down about 1.2 percent at $34.04. Altera’s shares were trading at well below the offer price suggesting the expectation of regulatory hurdles from investors, but analysts said there was virtually no overlap of products between the companies.