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Investors: plan ahead to deal with merger mania

Posted online

by Jack Lantis

for the Business Journal

Amazing as it seems, the merger trend just doesn't want to stop. And some financial experts believe 1998 is on pace to see even more mergers than 1997.

Whether you own two stocks or two dozen, you may need to prepare yourself and your portfolio for dealing with this merger trend.

When investing, you should always focus on your primary investment objectives. In doing so, you may want to ask yourself the following five questions when considering what to do with merger stocks.

1. Does this stock meet your objectives for income and/or growth?

Stocks that pay a relatively secure dividend are considered income stocks, while a growth stock is one from which you hope to benefit by its increasing value.

If the stock you own or are considering will not match your personal need for income or growth, you may need to find another choice.

2. How much risk does this stock carry?

You've heard the saying, with greater return potential comes greater risk. So, you should know a stock's suitability ahead of time to determine if it falls within your risk boundaries.

In general, larger, well-established companies usually have less risk than newer, up-and-comer companies. When evaluating a merger situation, you should determine if the combined companies are creating a stock that would fit within your risk suitability.

3. How easily can you sell this particular investment? You should also judge an investment by your need for liquidity and how easily you can convert the investment into cash on short notice.

For those of you seeking long-term investments for your portfolio, this question may be irrelevant. But if you consider a portion of your stocks as an avenue to quickly access cash, a highly liquid stock may be a necessity.

4. Is it a long-term or short-term investment? Similar to the issue of liquidity, the time frame of a stock's potential can influence your purchasing/owning decision. Some investors want to see results in six to 12 months, while you may seek long-term appreciation and can ride out market fluctuations over the the long haul.

5. Which strategies can I use if I own a merger stock? If you currently own stock that is a takeover target or merger candidate and its price has risen you should consider all your options in this situation.

For example, you may want to wait and see what type of offer the potential acquirer makes on your stock. Or, you could sell the stock immediately to remove the merger risk, though you could lose out on additional profit potential.

You could also use a sell-half/hold-half strategy, which can help you realize the profit on half of the shares and still allow you to participate in any further developments.

Mergers will likely affect your portfolio sometime in the future, so it's helpful to plan now and make objective decisions, rather than allowing your emotions to make those decisions for you later.

(Jack Lantis is an investment broker with A.G. Edwards & Sons Inc. in Springfield.)

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