US share tips: Cash in on merger mania

A boom in mergers and acquisitions (M&A) activity in the last three months of last year helped to turn 2005 into the biggest year for merger deals since 2000. Worldwide, the value of deals rose 38% to $2.9trn, with the US up 30% and Europe up 49%.

And there is no reason to expect activity to slow any time soon, says Steve Rosenbush on BusinessWeek.com: "billions of dollars have accumulated in the coffers of private-equity firms", and it all has to be spent. Also, corporations in countries such as China and India once beyond the capitalist pale are "playing a big role in mergers and acquisitions for the first time".

So, how should investors react to this glut of potential money-making opportunities? Insider dealing is illegal, but that doesn't mean that you're not allowed to speculate, something that shouldn't be too hard. Many of last year's acquisitions were undertaken for strategic reasons rather than being entirely opportunistic, so it could be simply a matter of checking the market for similar strategic fits between firms.

The old rule in acquisitions used to be to buy shares in the company that you expected to be bought and to sell shares in the company doing the buying. That may now be slightly less true than in the past (the number of deals in which the acquirer's stock "traded down dramatically" in 2005 were few), but the premiums buyers were willing to pay for their acquisitions were still 20%. This may be a "record low" (premiums peaked in 2000 at 29%), but it is still an extremely attractive return within the context of the overall market.

So, which deals are most likely? According to Rosenbush, there are ten, of which six are traditional M&A-type deals (the other four being initial public offering-type spin-offs or break-ups). The six are: Yahoo buying Netflix (NFLX, $24.93); AT&T buying BellSouth (BLS, $27.66); Sprint Nextel hooking up with Alltel (AT, $63.76); Oracle or SAP buying enterprise software maker Lawson (LWSN, $7.80); IBM buying business intelligence leader Business Objects (BOBJ, $42.59); and finally, BEA Systems (BEAS, $10.128) being "gobbled up" by either IBM, SAP or Oracle.