Value Stock-Picking, Week 3: How to Play the M&A Game

Editor's note: The Value Stock-Picking Training Program is a series of four weekly assignments. (To start with Week 1, click here.) Each assignment is based on one of James Altucher's strategies in his book Trade Like Warren Buffett. To get a copy of the book, click here.

This assignment was written by Stockpickr member Ira Krakow.

Mergers and Acquisitions: One of the greatest feelings you can have as a value stock-picker is to wake up one morning, turn on CNBC or log on to TheStreet.com and discover that a stock that you bought has received an offer to be acquired or taken private . Why? Because immediately on the news, the stock usually rockets up.

The market, however, does not typically price a stock at the deal price. Why? There are risks involved between the time the offer is made and (if indeed it occurs) the time the deal closes.

The process of evaluating this risk and taking action on it is referred to as merger arbitrage. In Trade Like Warren Buffett, James Altucher identifies the merger risks that should be considered before making a sell or hold move. But before we get those risks and this week's assignment, let's look at a few current examples of companies "in M&A play."

BEA Systems: If you took Jim Cramer's advice and bought BEA Systems (BEAS Quote - Cramer on BEAS - Stock Picks), on speculation of a takeover by Oracle (ORCL Quote - Cramer on ORCL - Stock Picks), you would have experienced that "good news in the morning" feeling. In a Wall Street Confidential video on TheStreet.com TV, Cramer explained how he figured out that Oracle would bid for BEA Systems.

A quick recap: He looked at Carl Icahn's Stockpickr portfolio and noticed that Icahn had taken a 13.2% stake in BEA. Icahn is an activist investor who looks for value and who had been urging a buyout (or acquisition ) before the Oracle offer.

On the news of Oracle's offer, BEA rocketed from $13.82 to $18.22 -- a gain of over 30%, far higher than Oracle's $17 offer price. But BEA is looking for an even more lucrative deal. It looks like a bidding war is in the offing.

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