NEW YORK (CNN/Money) – Denial isn't one of the seven deadly sins. But it might as well be for tech executives.

Just ask former Hewlett-Packard (Research) CEO Carly Fiorina. Failure to recognize that the Compaq merger wasn't working out cost Fiorina her job.

"When people whispered, she didn't hear. When people tried to give her advice, she ignored them. When people started to shout, she put her hands over her ears and screamed 'na-na, na-na, na-naah.' She forced them to ax her," wrote Erik Gordon, a marketing professor with Johns Hopkins University, in an e-mail to me on Wednesday.

There are plenty more CEOs who are guilty of living in denial.

Pip Coburn, global technology strategist with UBS, wrote in a recent report that the biggest problem facing tech companies is that a rebound in stock prices during the past two years has made them think that happy days are truly here again.

The Nasdaq, after all, is up 54 percent since the end of 2002. And the S&P Technology sector trades at 21.8 times 2005 earnings estimates, a P/E ratio that's nearly 30 percent higher than the overall market.

"Too many of the 580 companies we cover think THEY are gonna be market share winners and the stock market's premium doesn't discourage them from thinking that they aren't special," Coburn wrote.

But Coburn thinks nothing could be further from the truth. He said that 500 of the companies he and his team of analysts track are "restructurings that don't FULLY get they are restructurings." In other words, Coburn thinks the vast majority of tech firms need to make drastic changes in strategy but are unwilling to admit it.

Coburn has a list of tech companies in what he calls the penalty box, firms that he and his team think will underperform in the near future. Some of the better-known names in this group are Lucent (Research), EDS (Research), Siebel Systems (Research), BMC Software (Research) and Sun Microsystems (Research).

In many respects, Sun Microsystems is the perfect example of a company in denial, said Arnie Berman, senior technology strategist with CreditSights.

Sure, the company has made some strides during the past few years. It's embraced Linux and made nice with long-time rival Microsoft (Research). But Sun merely eked out a penny per share profit in its most recent quarter and is expected to just break even in the current quarter.

"Sun has not gotten its cost structure under control and is more of a strategic muddle," Berman said.

Alex Vallecillo, senior portfolio manager with National City Investment Management, which runs the Armada family of mutual funds, agrees that Sun, like HP, is living in denial, and adds that companies such as Gateway (Research), Xerox (Research) and Eastman Kodak (Research) are also companies that can be lumped into this category.

"These are all tech companies whose growth cycles have largely come and gone," said Vallecillo.

Clearly, some high-tech companies get it though. In telecom and software, for example, we've already seen a major wave of consolidation. Both of these industries have been plagued by intense price competition as too many companies chase a finite group of customers. And one way to try and combat these pressures is to weed out the weak.

But there are other areas of the tech sector where there has been little merger activity, most notably the semiconductor industry. Vallecillo said companies like Micron Technology (Research), Atmel (Research), PMC-Sierra (Research) and Vitesse Semiconductor (Research) could be vulnerable.

"If the environment remains one where top line growth is challenging, I'd suspect you'd see more M&A activity in chips rather than less," said Vallecillo.

Of course, the jury's still out on whether or not high-profile tech marriages like Oracle-PeopleSoft, Symantec-Veritas, Sprint-Nextel and SBC-AT&T will pan out well for these companies and their shareholders.

Needless to say, a mega-merger has yet to work out for HP. But that's not to say that deals can't work.

IBM (Research) transformed itself from a stodgy hardware company into a software and services powerhouse largely through acquisitions. Cisco Systems (Research) has had success with numerous purchases of small private companies. And Yahoo! (Research) has used acquisitions as a means to diversify and has done a good job of doing it.

Techs looking to thrive in a tough market have to do more than just gobble up competitors though.

If nothing else, Fiorina's ouster should clearly hammer home to investors how difficult the environment is for tech stocks. Being big isn't enough to guarantee success. The heady growth days of the late 1990s are probably gone for good and as a result, investors have to be a lot more selective.

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