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How To Cash In On Stock Market Merger

By Jason Markum

If you’ve been investing in the stock market for very long you know only one thing for certain, and that is that there is no certainty when it comes to stock market investing! This means that we’ve got to constantly chase profits anyway we can!

One way to find quick profits in the stock market is to find a company that is about to be taken over by another company… what we call a merger target, or sometimes an acquisition target.

If you can find out, or just guess correctly, that a company is about to be taken over by another company… you could stand to make a lot of money very quickly.

The problem is, there are no guarantees in life and even less so when it comes to guessing stock market mergers! Not to mention the fact that there’s an entire industry of people who do this for a living called arbitrageurs who engage some pretty sophisticated mathematical modeling to help them guess the right way.

But don’t despair! You don’t need a PhD in mathematics or applied financial modeling in order to guess right on a merger target if you’re careful and pay attention to a few specific things or areas that I’ll discuss in detail in this article today.

The first thing to watch out for are SEC 13D filings. A 13D is a form that every single investor has to file with the securities and exchange commission every time they purchase shares of stock in a company that equal at least 5% of the outstanding shares in that company.

An individual investor is required to file this form with the SEC within 10 days of making such a purchase. Now it is true, just because a person purchases 5% of the stock of a company… it doesn’t mean that they are about to take over the entire company. Many many times people are simply making strategic purchases for any number of reasons, or it simply may be a mutual fund, because they usually only make larger purchases of this scale or near this scale.

Still, as far as indicators go, a 13D is fairly strong. Like anything in life and certainly anything in the stock market, you should always do your own analysis and not simply rely on a 13D filing. Do your research on the company itself, analyze its balance sheet and analyze its income statement. Review things like off-balance-sheet items and be on the lookout for things that are undervalued such as real estate listings which may be worth more than their face value or book value. These things can all be indicators that the company is undervalued and thus ripe as a takeover target.

While you’re doing your research, run a tax analysis as well. Many times companies with large tax loss carry forwards are prime merger targets because other companies covet these tax write offs that they can use themselves once they acquire the company.

Investing in pre-mergers and acquisition companies is a very exciting and challenging investment strategy that should not be engaged in without serious understanding of all the things involved. But if you do your homework, it can be a lot of fun.

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