Typically when a company decides to buy another corporation, due to the prospect of growth and cutting cost and the possibility of a bidding war, the company that is desired buy another company will skyrocket in terms of price. Since the stock market is a rational expectations market, such information will be heeded immediately and positioned to bolster the price of a stock instantaneously. Now unless you happen to own that particular stock, typically when you do find about the prospective information, the potentially acquired stock price will already be inflated, discouraging buyers to get into the action. While such a process may be disappointing to investors looking for profits, as evidence shows, buying such a stock when a rumor or solidified information comes up may not be such a bad idea.

Now the question is will I make as much money as if I had already owned the stock. The truth is probably no but there is still opportunities to gain a large profit in this M&A frenzy. Probably the most common occurrence would be if a bidding war begins. Like in the 1980s when such applications were frequent and presented options for millions of profits to be made, such a possibility would assure a dramatic increase in the potentially acquired stock causing for large capital gains if such a stock is bought on the issuance of rumored or true material. If the bids are high enough and the companies involved have good credentials there is large potential of tremendous gains increasing your profit related to the original price by a large margin.

While such ideals are not as frequent as they were a few decades ago, a lot of the potential gains usually come in the period before the actual purchase, barring no competitors. Examples of such occurrences are found both domestically and internationally citing true examples of how one can make incredible amounts.

Domestically, looking at the past two to three years there are a few deals which has caught my interest in terms of potential gains. One of these deals is the one proposed in February of 2004 when Cingular Wireless bought AT&T in a widely acclaimed telecommunication agreement. During the two and a half year period AT&Ts stock escalated almost 37% from a price of near $21.00 to close to $30.00 in the early month of August 2006. Such a dramatic increase, especially from a large cap stock, is rare in such a short duration, and now when brokers and investors are becoming bullish on such sized stocks, there is even more potential for AT&T to grow. While more than likely, unless you owned the stock prior to the announcement, you would not have made such a large margin in terms of gains, an increase of 20-30% is still opportune for investors, citing one example of where an investor can bring in large gains from a potentially late purchase.

Another good example of how an investor can increase his or her capital gains can be attributed to the Kmart acquisition of Sears for 11.5 million during November of 2005. As the deal seemed strange to many investors as both companies have fallen relative to their glory days, the situation still did not mean it was not a good time to buy some stock of Sears. Since the merger, stocks of Sears rose almost 16% from near $119.00 to $138.00, a decent gain for another large cap stock. Again, like the situation with AT&T, while you probably would not have received the full 16% increase in capital gains, a 10-13% gain is still excellent for such a period of time and should continue to increase in the following months with the reportedly bullish mindset of investors on large cap stocks.

While such a situation may be ideal domestically, with the emergence of new global markets, there is a potential to acquire such capital gains abroad as well. A few examples would be in 2005, the company NTL bought English company Telewest Global which furthered the price from near 1254.00 to 1322.00: nearly a 5% increase for such a high priced equity. In Germany, EMC bought the foreign company, Captiva Software which raised the stock from 14.50 to near 18.60 close to 28% increase. Again, while it may be tough to gather all the potential capital gains from each M&A activity, if you are able to get into the action after such information is put out, there is still a wide potential for future earnings.

The M&A world is a both a very risky but rewarding venture. Known for its controversial episodes in the 1980s with arbitrage and criminals of Milken, Boesky, and Levine, there is a lot of risk for both the company and investor when such a situation arises. However, if things do go smoothly there is a tremendous opportunity for a dramatic increase for your portfolio percentage wise, and while you may not be able to acquire such amazing games each time, there will always be an occasion where you will get lucky and win big time.