Atmel saw huge success with the AVR at the end of the 90s, and they had the ARM microcontroller market nearly to themselves with their SAM7 and SAM9 series of controllers. Unfortunately they dropped the ball when the Cortex cores came (and ARM really sprung into popularity) which ST gladly picked up and ran away with (around 2008, when the STM32F1 was introduced). What happened to Atmel is that they chose to invest their resources in the AVR32 series (riding on the success of the 8-bit AVR and the strong political position of the AVR group inside Atmel; IIRC the ARM group was in France while the AVR group was based in Norway), but they didn't read the market correctly. Everyone was going away from proprietary architectures and into the Cortex ecosystem (not always rationally) - customers bought into the pseudo-standardization ARM was selling them. This standardization was only perceived, as once you get into the 32-bit domain, the code is mostly C that can easily compile between cores - its the peripheral drivers that are non-standard and where most of the porting work exists and going from an ST Cortex to an Atmel Cortex is a big headache. Anyway, this shift in the market caught Atmel (and others, like Microchip and Renesas) off guard and pushed ST into the Cortex dominance it has today.

Around that time, Atmel changed management and refocused the company (selling off their memory lines, other fringe products and their fabs) to be a primarily microcontroller company, but it was a bit too late and they found themselves behind. It's been a while since I worked with 8 bit micros, but the word is that their AVR series is not really innovative anymore.

Seems like Atmel is back on its feet though with great new Cortex-F7 processors (I think they have the industry speed record at 300mhz and some other benefits).

I haven't looked at the graphs, but $4.6bn is kind of a valuation low point considering their last 10 years or so. They probably understood that they're too small to survive by themselves, especially as how complicated microcontrollers are becoming. I don't think microcontrollers are such a fantastic business - talking to my friends at component distribution like Avnet and Arrow, they make a lot more money on some passive components (like power) than on micros, and for a long time some companies have been allegedly selling microcontrollers at a loss, just to get the designs.