Getting in on Takeover Action

- Alan Lavine and Gail Liberman

Mario Gabelli, probably Wall Street’s most famous takeover investment artist, is beating the tom-toms.

The recession and bear market in stocks has put a stop to many corporate mergers. Now Gabelli, whose New York-based company, Gabelli Asset Management Co., Rye, N.Y., manages $23 billion, believes more companies are on the acquisition path this year and next.

Reasons: It is a favorable regulatory environment, stocks are cheap and interest rates are low. Meanwhile a lot of companies are in sad financial shape. So they are more willing to sell.

If you are afraid to invest in just one or two stocks, some mutual funds can track down profitable mergers and acquisitions.

The Enterprise Mergers and Acquisitions Fund, managed by Gabelli, invests in companies that are expected to be acquired or merged in the next 12 to 18 months. The fund attempts to profit through a technique know as "risk arbitrage." The fund manager takes advantage of the difference between the price of the target company following the announcement and the deal price upon closing. When a company agrees to be acquired by another company, its stock price often rises to just below the stated acquisition price, resulting in a profit to shareholders.

Unfortunately, the stock price of the acquired company does not always go up. And planned mergers don’t always take place.

The fund has its eye on more than 70 companies, such as Paxson Communication, Metro-Goldwyn-Mayer and Tootsie Roll Industries.

The 10 largest holdings of the fund as of the end of February include Scios Inc., Gucci Group, Coorstek Inc., Dole Food Company Inc., Panamerican Beverages Inc., Fording Inc., Banyu Pharmaceutical Co. Ltd., Pharmacia Corp., Hershey Foods Corp. and Household International Inc.

Gabelli expects a lot of mergers and acquisitions in the media and telecommunication industries.

"Given Republican control of the House, the Telecom Act of 1996 is expected to be reexamined, and a possible round of consolidation in wireless telecom stocks could occur," Gabelli said in a recent shareholder report. "Television broadcasters would potentially benefit from consolidation in the newspaper and broadcasting companies, which could happen if the Federal Communication Commission gives the green light. Utilities could also be helped by a change in regulatory policy."

Other Gabelli mutual funds also invest in takeovers and mergers.The Gabelli Value Fund owns a limited number of stocks--155 reported at this writing. So if he is on target, the fund should reap big gains. Conversely, if he is wrong, this is one investment you won’t be bragging about at the next cocktail party.

The Gabelli Asset Fund invests in almost 400 stocks in a wide range of industries. The Gabelli ABC fund is a low-risk fund that profits from companies right after they are acquired. It is similar to the Enterprise Mergers and Acquisitions Fund.

#

Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).