Mergers are usually good for the merging companies to eliminate duplicate corporate functions such as payroll administration and researching on similar subjects.
The company being acquired usually has huge appreciation. I have a screen to search for the potential candidates. The Early Recovery (a phase of the market cycle defined by me) has more of these candidates. Big companies know their values and see good values when these stocks have been beaten in the market.
Then I do an intangible analysis on items that are not available in the financial statements and/or cannot be quantified. They are patents, technologies, research staffs, customer base, brand name, barriers to entry, distribution channels, competition, product cycle, management, pension obligations…
In 2003 I bought stock of a software company that was acquired by IBM profiting more than double. In the 2008 cycle, I bought ALU at $1 and sold it briefly at 40% profit. I expected Cisco would acquire it but it did not. In two years it was acquired by another competitor for more than $3. I need patience. ALU had a lot of patents.
The company going to be acquired tries to make the financial statements very rosy. A Chinese company tricked Caterpillar to acquire it and Caterpillar lost huge in this deal. Even big company can be fooled. It happens every day for buying small businesses. One simple trick is asking their friends buying the services on the first few months after the business has been sold.