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M&A activity seems to be picking up recently. This week Yahoo (NASDAQ:YHOO) picked up Tumblr for over $1B despite the fact the company had just ~$13mm worth of annual revenue at the time of acquisition. Data & web security firm Websense (NASDAQ:WBSN) was also acquired for a little over $900mm by Vista Equity Partners on Tuesday which was just under a 30% premium to its current stock price prior to offer. Strengthening M&A activity makes logical sense here given low financing costs and the return of "animal spirits" into the market.

I particularly like the prospect of increased takeovers in the tech space given the huge amount of cash on the balance sheets of most of the large cap players in Technology. Two stocks that could make logical acquisition targets are profiled below. I am playing both by buying out of the money bull call spread positions. Given the low volatility/tiny option premiums in the market right now, I like the risk/reward currently using this strategy.

Fusion-io Inc. (NYSE:FIO) - The maker of storage memory platforms for enterprise data decentralization has become the target of buyout rumors recently, including a piece in Bloomberg today. The shares have been under pressure recently as both the CEO and a co-founder have left the company. The stock is at a record low based on its price-to-sales ratio. Numerous suitors could be interested in this pioneer for flash memory for servers including Oracle (NYSE:ORCL), NetApp (NASDAQ:NTAP), EMC Corp (NYSE:EMC) and even Hewlett Packard (NYSE:HPQ). This would give the acquirer more exposure to a segment of the memory space that is expected to ~double over the next three years according to Bloomberg based on a compilation of analysts' estimates. The company has a bite-sized market capitalization of $1.4B not including over $300mm in net cash on its balance sheet. Operating cash flow has gone from negative in FY2011 to over $76mm over the trailing 12 months on rapidly expanding revenues.

Nuance Communications (NASDAQ:NUAN) - The maker of voice recognition software also has had a tough few months, seeing its stock price fall some 25% since it recent highs in February. Noted valued investor/agitator Carl Icahn has more than a 10% stake in the stock which should result in more shareholder friendly moves up to and including pushing the company towards a sale. The company supplies its technology to Apple (NASDAQ:AAPL) and other smart phone manufacturers, any of which could be a logical acquirer.

Although this would be a bigger target than Fusion given it has an enterprise value of ~$7.3B which includes debt, it is not that expensive at less than 13x forward earnings. Analysts expect revenues to increase at better than a 10% CAGR in 2013 & 2014. The company recently initiated a $500mm stock repurchase program and also received an upgrade to "Outperform" over at Wedbush. Oppenheimer recently postulated what steps Icahn may take in the future and has a $31 price target on NUAN if Icahn is successful.

Source: 2 Possible Buyout Candidates In Tech