Booyah Breakdown: Tackling Takeovers

Editor's note: Welcome to "Booyah Breakdown," an explanation of certain terms and topics Jim Cramer discusses on his "Mad Money" TV show. Feel free to ask a question if you're confused about something Cramer talks about, but please keep in mind that we do not provide advice on specific stocks.

It's no surprise that the vultures have started to swarm since hottie Carmen Electra announced her separation from her husband of three years, rocker Dave Navarro. Already, rumors have been flying about her new flings.

That's because now that she's on the singles scene again, Carmen's the hottest takeover target in Hollywood. And there clearly are good reasons to be the first on the scene of a takeover.

Just ask Jim Cramer. On his July 25 show, he discussed how investors could profit from buying a potential takeover target. He then revealed a list of technology stocks that he believes might be acquired.

Spotting takeover targets can be a great way to make some mad money, and Cramer can teach you how to look for these targets. But we got a bunch of emails questioning the mechanics surrounding these deals. So let's tackle those issues.

Take Me, I'm Yours

Before we dive in to the details, first know that there's a difference between a merger and an acquisition. A merger is basically the mutual decision of two companies that want to combine and become one entity. It's a decision of "equals."

As you can imagine, two companies teaming up and agreeing that they're true equals doesn't happen often. In fact, a lot of the times you hear the term "merger," it's actually a takeover that's occurring.

A takeover, or acquisition, happens when a smaller company is purchased by a bigger one. In his recent "Mad Money" show, Cramer was referring to smaller companies that he thought were going to be acquired. And he suggested that owning shares in these little companies could be a big boon if they were scooped up.

That's because in most instances, the purchasing company offers some sort of premium for the little guy's shares. If the takeover turns into a bidding war with other potential buyers, the premium could get pretty high.

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