You know you're in a red-hot merger and acquisition (M&A) market when Yurie Systems Inc. – a company nobody had heard of two years ago – can command $1 billion from powerhouse Lucent Technologies Inc.

"There was a big splash about Yurie," says Mark Fahlberg, the managing director of technology for Coopers & Lybrand Securities in Tyson's Corner. "Those larger deals get the mindshare." And while the Yurie deal garnered a lot of press, here's an even more interesting story: According to Fahlberg, about 80 percent of last year's M&A deals were smaller than $250 million.

What does that mean? First, there were a lot of deals. Second, despite the giant, Yurie-caliber deals we read about in the Wall Street Journal, there are a lot of smaller deals that far outnumber the larger ones.

Here's proof: Last year, the IPO market for technology companies was worth about $9 billion. The M&A market, not including telecommunications-services mergers (like the still-pending WorldCom-MCI merger that alone was worth $37 billion), weighed in at a whopping $55 billion in the same timeframe.

According to Douglas Schmidt, managing director at Legg Mason Inc., M&A activity has usually been eclipsed by the hyperactive IPO market, but lately, the reverse is true: "Over the last several months there [has] been more stock coming out of the market from acquisitions or repurchases than there are IPOs putting stock back into the market."

So what's the driving force behind all the deals? Here's our take:

Why R&D when you can M&A?

Of all the factors driving the M&A frenzy in the technology industry, the most pronounced is the fact that one quick investment is often cheaper and usually more time-efficient than years of expensive research and development. Lucent could have developed its own ATM access technology, but why bother when it could afford to drop a cool billion on Yurie?

R&D efforts require a large pool of human and capital resources. Moreover, they typically have a long cycle of production that's incompatible with the hurry-up pace of the technology industry. Washington's own thriving biotechnology industry was a pioneer of the "virtual" R&D model, having always partnered with big pharmaceutical companies to bring drugs to market. And the partnership is dependent: Biotech companies may need their deep pockets, but the pharmaceutical giants also rely on the entrepreneurial research of the small biotechnology company.

Money is cheap.

Like human beings, when companies are flush with cash, they're more likely to go shopping. "For public companies, their currency is at an all-time high," points out Roger Novak a general partner at Novak Biddle Venture Partners.

"Capital is always interested in growth," says Legg Mason's Schmidt. "Investors are looking to deploy their capital in a high-growth segment" and that almost always means technology. A high-growth industry means high premiums for stockholders. "If you believe the market is pricing a stock correctly and a company comes along and pays 30, 40, or 50 percent more, there's greater and greater growth," he adds. "You just can't do that in a slow-growth industry."

Human capital is scarce.

The technology labor market is tight. Consider that giant computer services companies have thousands of openings – some of them in mission-critical departments. Then consider that it costs companies like Electronic Data Systems Corp. and IBM some $50,000 per employee for hiring, training and retention. At what point do you stop recruiting, and simply start buying companies and their employees?

David Lucien, president of Reston's Interpro Corp., a strategy and market development company specializing in mergers and acquisitions, has been advising companies to position their acquisition strategy to look for people first and technology second. "These companies need quality people to fulfill their needs," he says. "They can plug them into existing opportunities in their own organizations."

Life is short.

The lifecycle of technology companies is getting shorter and shorter. When the original management of a company discovers they aren't able to keep up the pace, they should consider selling. While the M&A market is a gold mine of opportunity for successful companies, it's also an attractive exit strategy for companies that aren't so successful.

The factors that are driving the technology M&A market are not much different here in the than they are in other tech centers around the country. But Fahlberg, who left his post as head of tech M&A at BancAmerica Robertson Stephens in San Francisco, points out one big difference: the enthusiasm factor.

"There's a bit more excitement here in that you feel like you're really making a difference in the D.C. area," Fahlberg says. "I didn't expect this area to be such a technology center."