NEW YORK (CNN/Money) -
There's a whole lotta shakin' goin' on in tech so far this year.
Tech merger and acquisition activity has picked up considerably. And that's had to make investors in the target companies quite happy.
Shares of Walt Disney (DIS: Research, Estimates) are up 16 percent since Comcast (CMCSA: Research, Estimates) announced its surprise bid for the company on Wednesday.
AT&T Wireless (AWE: Research, Estimates) has surged nearly 50 percent this year, thanks in large part to the bidding war that's taking place for the company. (Vodafone (VOD: Research, Estimates) and Cingular are expected to submit final bids Friday.)
And there are a bunch of smaller tech companies that have been rewarded with handsome takeover premiums.
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Business-to-business software developer Ariba (ARBA: Research, Estimates) agreed to pay a 23 percent premium for competitor FreeMarkets (FMKT: Research, Estimates) last month.
Hewlett-Packard (HPQ: Research, Estimates) announced earlier this month that it was buying network management software firm Novadigm (NVDM: Research, Estimates) for a 28 percent premium.
Earlier this week, telecom equipment manufacturer Juniper Networks (JNPR: Research, Estimates) agreed to buy NetScreen Technologies (NSCN: Research, Estimates), a maker of network security products, for a whopping 57 percent premium.
Finally, chip testing firm ST Assembly (STTS: Research, Estimates) announced (also this week) it was buying rival ChipPac (CHPC: Research, Estimates) for a 47 percent premium. Whew.
Of course, the big question for investors is whether or not the industry will see even more consolidation this year?
Michael Cohen, director of research for Pacific American Securities, thinks there's more to come. Since many tech stocks surged last year, Cohen said some larger tech companies are willing to use their shares to do deals.
The Juniper-NetScreen deal is a perfect example of that. Before that acquisition was announced, NetScreen was trading at 44 times 2004 earnings estimates. That's not exactly a bargain. But Juniper could pull off an acquisition without worrying about too big of an impact to earnings since its shares traded at 84 times this year's earnings projections.
However, Cohen argues that companies will probably want to make moves sooner rather than later, before tech stocks become prohibitively expensive again.
Expect more software and telecom deals
So where will there be more merger activity? John Rutledge, manager of the Evergreen Technology fund, said that the software sector should continue to see more consolidation since there is still a glut of niche companies.
"Software makes more sense for consolidation than many other areas of tech. Large corporate customers don't want to buy from that many vendors," Rutledge said.
Oracle (ORCL: Research, Estimates), which re-raised its bid for rival PeopleSoft (PSFT: Research, Estimates) last week, could look elsewhere if its latest offer is rejected by PeopleSoft shareholders or blocked by regulators.
Rutledge said telecom equipment is another area that is ripe for more deals, especially if more of their customers, telecom carriers like AT&T Wireless, merge. That would be the case because as telecom service providers get bigger, that could increase their bargaining power when it comes to equipment prices.
Still, trying to identify specific takeover targets is a risky parlor game. Many tech companies that are viewed as perennial takeover candidates, such as BEA Systems (BEAS: Research, Estimates) and Sun Microsystems (SUNW: Research, Estimates), are perceived as targets simply because they have underperformed, Rutledge said.
"Investors should never buy a tech stock solely on the hope that it will be bought at a higher price," Rutledge said.
That's why the best strategy for tech investors is to buy healthy companies, as opposed to laggards.
"I don't plan on making money in tech through M&A," said Sunil Reddy, manager of the Fifth Third Technology fund. "Investors should look for tech stocks with good valuations and good organic growth."
But even if investors resist the urge to place bets on individual takeover targets, they can take solace in the fact that a general pickup in tech consolidation is a good sign.
"At this point of an economic recovery, companies are gaining confidence and are looking forward to creating strategic advantages," Cohen said. "This is really the beginning of an uptick."
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