With HP upping its bid to $30 in the bidding war with Dell for storage networking 3Par, it's starting to send the sign that big technology companies are desperate. It's looking more like they are stuck. They can't grow internally, so they have to look outside for growth.

Actually, if you think about it, it's quite absurd: Just a few months ago, 3Par was $10 a share. It's now nearly tripled. And why? Simply because somebody decided they had to have them, like they'd found the perfect house in the middle of the housing bubble.

The trend toward consolidation and giant companies eating up newer companies in the search for growth and innovation is an old one in technology, but it seems to becoming a bigger component of growth for the largest global technology companies, who have lost their ability to launch new technology. This certainly appears to be the case with players like HP, Dell, Microsoft, and Cisco. The new innovation is not coming from within, it's coming from outside.

Does that mean we have a massive boom ahead of us in technology? Well, it's actually already been happening over the last 5 years. Think of Oracle buying Siebel, SAP buying Sybase, and Microsoft trying to buy Yahoo (and failing). Even Google has gotten into the act, as you can see their growth strategy is focused on M&A through purchases such as YouTube, AdMob, and Slide. And Cisco has been active in the video space, buying Scientific-Atlanta, WebEx, Tandberg and today putting forth a smallish deal with the purchase of ExtendMedia.

Why is it that big companies have such a hunger to acquire? Part of the reason is for whatever reason, it becomes harder and harder for them to innovate as they get larger. Cisco has always been an acquisition-driven company, but that activity appears to have accelerated in recent years. Most of the company's new product has come from big acquisitions -- they have not been very successful at internal product development for the last five years.

Does this mean you run out and buy smaller technology companies that are going to be gobbled up? You'd have to do that very selectively. Technology shares have appreciated rapidly, and actually the data show that M&A booms typically come when markets are frothy, not when they are down.

Don't believe me? Look at the M&A frenzy at the top of the technology and telecom bubble of 1999/2000. There was also a mini boomlet in M&A from 2005-2007.

Yes, this seems conterintuitive, but it's true. James Stewart of the Wall Street Journal supported this argument with a very well thought out column earlier this week.



So be wary the M&A trend. It's could be heading in the opposite direction of the market. And those smaller firms that could be gobbled up are getting richer valuations. Yes, I think more deals are on the way, but some careful anlaysis and careful examination of valuation should precede which stocks get pegged as takeover candidates. I am doing more research and will write some more about this next week.