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Honey, I Shrunk the Tech Sector: M&A Alters the Game

"The winners are likely to be H-P and Cisco, in my opinion," said Tobias, who is also the CEO of startup Kashless.org. "It's going to come down to who can integrate well."

Cisco and Hewlett-Packard

Tobias explained that since the "mess" of the Compaq merger, H-P has sharpened up its M&A strategy. He even witnessed this firsthand when the tech giant bought Ignition-backed RLX Technologies and Consera Software.

"They bought two of our companies at Ignition and did a great job," he said, adding that Cisco is no slouch when it comes to buying technology. "Cisco's business model is to buy boxes that are [similar to] their existing boxes, connect them up with their distribution model and some of their secret software and make them more valuable."

The San Jose, Calif.-based firm, for example, bought Linksys for $500 million in 2003, which paved the way for Cisco's entry into the home networking market.

IBM and Oracle

As for IBM (IBM - Get Report) and Oracle, Tobias is less impressed with their acquisition records, pointing particularly to the challenges Oracle faced buying and integrating PeopleSoft.

IBM, however, won kudos from investors and analysts for walking away from the Sun acquisition, which could have proved a headache for CEO Sam Palmisano and his team.

Inevitably, IBM would have been forced to dip into its cash reserves to fix Sun's many execution problems, potentially distracting the tech monster at a time when cash is king.

Still, Oracle has clearly weighed the risks of the Sun acquisition, and could significantly bolster its database offerings through Sun's IP. The troubled tech giant could also open up new revenue streams for Oracle through its blade server business.

Cisco, however, has arguably made the boldest move of all, launching a blade-based technology which competes directly with H-P and IBM, two of its biggest resellers.

The UCS could also put big pressure on Cisco's numbers. Excluding items, Cisco's gross margin is typically around 64%, a far cry from the blade server market, where margins are between 18% and 20%.

"The first question you have to ask is how will Cisco be able to maintain gross margin structure in this market," says Frost & Sullivan's Gruia, but added that Cisco could combat this through high-margin technologies such as security.

Like hormonal teenagers on the rebound, H-P and IBM have already leapt into the arms of Cisco's rivals, clinching deals with Alcatel-Lucent (ALU) and Juniper (JNPR), respectively. Both firms, however, are unlikely to stop there.

H-P already has its own ProCurve networking business, although Gruia thinks that things are going to really heat up.

In addition to aggressive pricing, H-P and IBM are also likely to eye acquisitions, particularly in high-speed networking. "[Switching specialist] Voltaire (VOLT) could be in play very much," said Gruia. "They have a very good product, and I think they will be snapped up by somebody."

Clearly, however, big changes lie ahead, making it tough to predict who will emerge victorious.

"It's too early to call a winner," said Sajai Krishnan, CEO of cloud storage specialist Parascale. "These companies are starting to each other's turf, but history has shown that it's a lot harder to pull off than you would think at first glance."

Shrewd investors should wait before picking a horse in this particular race.
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