It's Time for Tech Mergers

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Karl Will, head of mergers and acquisitions for megabank JPMorgan Chase, says that the technology sector is ripe for consolidation. I couldn't agree more.

The backdrop
Sure, Microsoft (Nasdaq: MSFT) failed to bag Yahoo! (Nasdaq: YHOO) this spring, the long-running satellite radio courtship never seems to end, and who knows where the video game carousel will stop. But Hewlett-Packard (NYSE: HPQ) is picking up the slack, and gadget-heavy wireless provider Alltel just got a $28 billion bid from Verizon (NYSE: VZ). Yep, plenty of action on the dance floor these days.

In a recent interview with Barron's, Will said that the tech merger activity today reminds him of the heyday of the tech bubble. They're blockbusting megadeals, paid in cash for the most part -- which makes this round of consolidation healthier than the last one. "Over 80% of all [deals] in 2008, year-to-date, has been in the form of cash, versus about 50% of all deals in 2000. Which doesn't come close to illustrating the difference in tech, because in 2000 in tech, my gut tells me it was 90% stock!" exclaims Mr. Will. "It's swung completely."

Spring into action!
The giants of technology are flush with cash and itching to spend it on growth opportunities that can contribute to the bottom line immediately. This would be a good time to invest in the future deal targets, before Mr. Market tacks the traditional 30%-40% buyout premiums onto their share prices. Here's a handful of the stocks running around with bulls-eyes painted on them:

Company	3-Year Avg. EPS Growth	CAPS Rating
CA	173%	**
NVIDIA (Nasdaq: NVDA)	77%	*****
Blue Coat Systems (Nasdaq: BCSI)	66%	****

Source for EPS Growth: Capital IQ.

Understand that this is merely a starting point for your own research, not an official list of Foolish recommendations. We can't talk about all the merger signs out there in one little article -- but pointing out the telltale signs of big deals to come is perfectly doable.

Five years ago, the company formerly known as Computer Associates was losing money hand over fist. But the sinking ship has been righted, and with data centers becoming increasingly complex every day, the company's systems management products are now in great demand. I could easily imagine a Big Blue hand reaching down to pick up this $13 billion tidbit -- or to start a bidding war over the goodies.

Blue Coat is a similar up-and-comer in the overheated sector of computer network security. If mighty Cisco (Nasdaq: CSCO) doesn't take this highly focused drop-in security solutions specialist off the market soon, one of its rivals certainly will. With an enterprise value of only around $530 million today, it's a bargain-basement deal with tremendous potential.

Computer graphics expert NVIDIA might look out of place here -- at first glance. There would be serious antitrust issues involved if one of its direct competitors placed a bid today. There are only three credible graphics chip makers today, both of which also compete with NVIDIA in the market for system platform chip sets.

But that's just the thing: Intel and AMD tend to take turns in making serious missteps and giving the other guy the upper hand in their never-ending seesaw battle. NVIDIA is a Switzerland of sorts, selling chips that support both sides. If a large system build like HP stepped in and bought the neutral party, the deal might pass antitrust muster and let the buyer supply itself with platform chips. Cutting out the middle man tends to lower the costs of doing business.

Get a move on
It's hard to say how long this big-time buying spree might last. But judging by the plethora of fat bank accounts in the tech industry, along with the increasing need to buy growth rather than building it in-house, I think it will last a few quarters. This is indeed a great time to buy tech stocks.

Further Foolishness:

• Time for Tech? Yes!
• Tech Stock Investing Advantages
• The Real China Miracle