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Managing Merger Anxiety

The trader discusses how to know what a big merger is going to do to a stock.
Author:

What do you do when a company you invested in announces a monster acquisition? First, you can't make a snap decision. You have to hear the logic behind the move. You have to hear how the companies fit together and what the plans are.

Take this

Lernout & Hauspie

(LHSP)

acquisition this morning. I am neither long nor short this battleground stock, meaning a stock where the shorts skirmish with the longs as if it were Peleliu (stop everything and order Eugene Sledge's

With the Old Breed: At Peleliu and Okinawa

right now if you are interested in that grim battle).

But this is the kind of merger that makes sense to me because it creates a dominant player in the industry. If the Lernout team can explain how it will save money and how this acquisition will be "accretive" -- meaning that it will add to next year's earnings -- it might be an interesting buy.

But, if Lernout says that it will be expensive and not add to numbers and that it is not sure yet how to consolidate the two operations, that's not good news. And I will prepare myself for the next wave of attacks by

Herb Greenberg

on this red-hot stock.

Believe it or not, stuff like this actually happens. When

Verisign

(VRSN) - Get Report

bought

Network Solutions

(NSOL)

TST Recommends

recently, I felt dazed and confused after the first conference call explaining the move. It seemed like nobody had thought it through, as if someone had heard about the merger, maybe someone from the press, and they simply decided to get the word out before they had figured out how to tell the story. That contributed to a huge downdraft in Verisign. I held on, but I didn't feel good about it until the next day when Verisign did another run-through of the call and explained it better.

Same thing with

E.piphany

(EPNY)

. I love this company and when it announced its first big merger I was thrilled. But not this time. This time management said it knew the acquisition was expensive. Ouch! Keep those thoughts to yourselves, please. We bolted from the stock.

The worst mergers along these lines were the last rounds of cloddy acquisitions done by

Bank One

(ONE) - Get Report

and

First Union

, where no attempt to rationalize the acquisitions could be made except they seemed to insulate the acquirers from being taken over by better companies. Run, don't walk from those kinds of deals.

If it helps, I have bought

Cisco

(CSCO) - Get Report

on every single dip created by one of its acquisitions, because one of the things this company does right is make acquisitions. Often the decline created by the issuance of new shares is a totally buyable decline. Sometimes you have to hit the exit button. Make sure you don't do the wrong thing.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.