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

Consolidation is the name of the game in tech, so which stocks will come out victorious?

Back in the good old days, there was a degree of certainty about the tech sector. Companies like


(CSCO) - Get Report



(HPQ) - Get Report

could partner knowing that one essentially touted networking gear and the other sold servers and software. The


(GOOG) - Get Report

CEO could even sit on the board of


(HPQ) - Get Report

with barely

a raised eyebrow

. Not any more, though.

The recession has been the catalyst for a major tech shake-up, turning long-standing buddies into


and prompting acquisitions that would have been greeted with incredulity just a couple of years ago. Whether Cisco's entry into the

server market

, or


(ORCL) - Get Report

surprise acquisition


Sun Microsystems


, the tech market is undergoing a rapid transformation. The big question is -- who will be the winners and losers?

"There have been a few big tectonic shifts that have happened," Ron Gruia, an analyst at

Frost & Sullivan


. "When Cisco announced their UCS (Unified Computing System), that was the first one of the big moves that have happened."

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With IT budgets tightening and companies becoming ever more global, tech executives are looking to reduce the number of suppliers they deal with. As a result, tech companies are on an M&A and partnership tear.

"There's going to be more of that because there's still the drive for single-source IT buying in CIO offices," said Martin Tobias, a partner at Bellevue, Wash.-based venture capital firm

Ignition Partners

. "The more things they can buy from one company, the happier they are."

Among the recent notable tech-deal news:

Oracle bought Sun Microsystems

IBM bought SPSS

EMC bought Data Domain

Radware bought Nortel's Alteon switch business

Rackable Bought Silicon Graphics

Broadcom attempted, unsuccessfully, to buy Emulex

Speculation has linked NetApp with more M&A

Dell is reportedly planning a "significant acquisition" possibly in storage or services

As for the sector's winner and losers, the VC feels that it will all come down to execution, rather than the nuts and bolts of technology.

"The winners are likely to be H-P and Cisco, in my opinion," said Tobias, who is also the CEO of startup

. "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


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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


for $500 million in 2003, which paved the way for Cisco's entry into the home networking market.

IBM and Oracle

As for


(IBM) - Get Report

and Oracle, Tobias is less impressed with their

acquisition records

, pointing particularly to the


Oracle faced buying and




IBM, however, won


from investors and analysts for

walking away

from the Sun acquisition, which could have proved a


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


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


on the rebound, H-P and IBM have already leapt into the arms of Cisco's rivals, clinching







(JNPR) - Get Report

, respectively. Both firms, however, are unlikely to stop there.

H-P already has its own


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


(VOLT) - Get Report

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


. "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.