On Monday, Advanced Micro Devices (AMD) said it will pay $5.4 billion to acquire Canadian graphics chip maker, ATI Technologies Inc., putting further pressure on rival graphics firm NVIDIA Corp.

ATI stands to gain a number of competitive strengths, including the technical expertise of AMD's accomplished engineers, and access to AMD's manufacturing prowess. This would be on top of ATI's own, world-class design team.

NVIDIA may be additionally threatened by the marketing power of AMD.

Graphics processors are usually bought independent of the CPU being used, however NVIDA benefited greatly from the strategic marketing partnership with AMD's Athlon 64, appealing to many enthusiast.

Sindey Ho of Merril Lynch says the new deal will give AMD a change of heart, and has no doubt that AMD will now push for ATI’s [graphic chips] to the enthusiast market instead putting more pressure on NVIDIA’s lucrative margin on the business.

NVIDIA also produces system chipsets, the underlying foundation that allows the graphics chip, the main memory, and the CPU to communicate with each other in PC's.

Unlike ATI, NVIDIA’s chipset business generates a healthy gross margin, powering nearly 40 percent of all AMD based systems - 20 percent of its sales.

Ho believes it’s clear that AMD will eventually source most chipsets through ATI, predicting NVIDIA's addressable market share will shrink overtime. That’s bad news for NVIDIA, he asserts.

In light of these challenges, some analyst believe the merger between AMD and ATI may work in NVIDA's favor, especially in the long run.

I continue to think that NVIDA will support AMD with chipsets but will play more of a role in the high end systems, an area that AMD has been recently making inroads, Doug Freedman of American Technical Research said in his Monday note.

On a short term basis, perception wise, NVIDA will be negatively impacted Satya Chillara, his colleague contends. However, AMD business will continue as OEMs want at least two sources, and secondly, [NVIDA] will likely get closer to Intel-based platforms.

One thing they both agree on is that this doesn’t make NVIDIA more appealing to Intel as a possible acquisition. I do not believe Intel would be interested in ownership or more outsourcing of chipsets Freedman says.

Ho concurred: In the end, we think NVIDIA will be the lone GPU company, fighting for market share that is getting increasingly difficult to get.

Shares of Nvidia rose 10.43 percent to hit $19.56 in the NASDAQ stock exchange in afternoon trading.