There's a method to merger madness.

Profit by purchasing the stock of a potential takeover candidate

Merger mania may be painful to the executives of a company being acquired, but other investors can benefit from their pain.

In fact, it's just those kinds of opportunities that professional investors look for when trawling for stocks that are good takeover candidates. By buying a stock that's languishing for competitive reasons investors can, in effect, own larger; better-run companies by holding onto underperformers that are ripe for the picking. Furthermore, when a company is acquired, the firm taking it over pays a premium over the target's current stock price. Then, according to the terms of the deal, shareholders get a portion of the shares of the acquiring company--in most cases, a more valuable stock.

The past few years have been boom times for mergers and acquisitions. In 1998, $1.6 trillion, or 12,238 merger deals were announced, up from $901.4 billion comprising 11,174 transactions in 1997. And $1.1 trillion in mergers comprising 7,349 deals have been announced through September 7, nearly as much as the total dollar value last year.

Fund managers and analysts say there is no clear-cut way to calculate when a company will become a takeover candidate. But certain signs--like a sagging stock price (lasting a period of 12 months or mom), weak earnings and poor management--can help pinpoint the next takeover candidate.

Dawn Alston Paige, CFA, a portfolio manager who runs the Midcap Value Fund for Loomis Sayles & Co. in Bloomfield Hills, Michigan, points to price wars as one of the many factors that can spur consolidation activity in an industry. "When price pressures drive out the profitability of an industry, look for consolidation," she says. Paige points to Birmingham, Alabama-based banking firm AmSouth Bancorporation's (NYSE: ASO) takeover of Nashville, Tennessee-based First American Corp. (NYSE: FAM) as an example.

Poor management is another major contributor to takeover bids. Investors should look for a management team that knows what to do with the company's assets.

In general, investors trying to stockpile growth companies should look for firms with superior earnings growth relative to the Standard & Poor's 500. One measure of a firm's strength is its historical performance and sales. Additionally, stocks that are exceeding the profits of their peer group are firms that investors can securely hold on to.

Urge to Merge

The '90s are shaping up as the decade of the megamerger. So far this year, already $1.1 trillion in mergers have been announced, according to Securities Data Co., a Newark, New Jersey firm that tracks investment banking activity. Here are the live largest mergers of 1999, ranked by deal size.

Target                    Acquirer               Size of Deal(*)

AirTouch Communications   Vodafone Group PLC         $65.902
MediaOne Group Inc.       AT&T Corp.                  63.115
US West Inc.              Qwest Communications        48.480
CBS Corp.                 Viacom Inc.                 37.580
Atlantic Richfield Co.    BP Amoco PLC                33.702

Target                       Date Announced

AirTouch Communications        1/18/99(**)
MediaOne Group Inc.            4/22/99
US West Inc.                   6/14/99
CBS Corp.                       9/7/99
Atlantic Richfield Co.          4/1/99

(*) In billions (including net debt of target). (**) Merger completed June 30, 1999.

Source: Securities Data Co.

RELATED ARTICLE: B.E. BASICS

Stock splits add value

If you have individual stocks in your portfolio, or if you're just a casual observer of the market, you've probably heard the term "stock split" before. But what exactly is a stock split?

With a stock split, the management of a company decides to increase the number of outstanding shares available to the public. More often than not, companies execute a 2-for-1 stock split, although 3-for-2 splits are also common. Say you own one share of a stock worth $20. After a 2-for-1 split, you will own 2 shares that are now valued at $10 per share.

There are a number of strategic reasons companies decide to split their stock. These include:

* Increased liquidity. If management wants to interest investors but feels the company's shares are too expensive, a stock split will decrease the price and make it more accessible to small investors, increasing its "liquidity," or how easily it trades.

* Hostile takeover. If management holds a small percentage of the outstanding shares, making more stock available through a split can decrease the chances of a hostile takeover.

* Change of stock market. If a small company whose shares are listed on the Nasdaq wants to list its stock on another exchange, it has to have a higher number of shares outstanding. The New York Stock Exchange, for example, requires that companies have a minimum of 1.1 million shares and at least 2,000 shareholders before it will list the stock.

* Acquisition purposes. If a larger company wants to buy another with minimal cash or debt, a stock split will produce additional shares, a powerful inducement for the shareholders and directors of the company being taken over.

There is also the reverse split, the opposite of a regular stock split. In this case, say a 1-for-2 split, the number of outstanding shares decreases while the stock price increases. For example, if a company's shares are trading at $50, they will be worth $100 once the reverse split is executed. One of the most common reasons for a reverse split is that management feels the stock price is too low to attract institutional investors, such as mutual funds and pension funds.

But don't just buy a stock because it's splitting its shares. Conduct a thorough research and see if the company is a good long-term buy or not.

--Ivan Cintron3