Question:

How does an investor play the mergers and acquisitions game? When two companies are expected to merge, which stock should an investor buy?  How does an investor find the possible companies that may become acquired? The stock of the company almost always goes higher when it is announced.  Cramer mentioned 10 possible mergers on his show last night (20 companies).  Just wondered. Some of his ideas don’t materialize.

My Response:

It’s often times difficult to tell if a company may be acquired.. and it’s often just rumor or speculation which can move a stock.  The M&A game is mostly just pure luck unless of course you’re an insider who knows a little something.. which of course would get you into trouble with the SEC.  In a situation where a company is being purchased, you will almost always get a pop because the buying company will pay a premium.  In a merger situation of relative equals, it really depends on the situation and if the market thinks it makes sense.   Speculating on which companies may be bought out make for decent entertainment I suppose and he may just be right on a couple, but that alone is never a reason to buy a company.  The good news is that what you’ll find is that most of the companies that are being bought out and paid a premium for are exactly the companies that we are looking at.  Small, high growth companies that can add to the bottom lines of their larger counterparts.