Target Companies are good investments

What about investing in target companies? After all, the real price surge that you see on acquisitions is in the companies that are acquired rather than in the acquiring firms. Not surprisingly, investment strategies built around target firms claim to have found a way to identify these firms before the announcements:

• Private Sources: The most common sales pitch, of course, is that private (and reliable) sources have provided information on an upcoming acquisition. If the sales pitch is true, it is almost certainly illegal, since any persons who have this information (employees at the companies, or the investment bankers involved in the deal) would be classified as insiders by the SEC. If it is not true, you are just chasing another rumor in the market.
• Analytical models: Some investors argue that you can use analytical devices or metrics to identify potential takeover targets. These metrics can range from sudden increases in trading volume (indicating that someone is accumulating large numbers of shares in the company) to fundamentals (low PE ratios and poor management). While not every potential target will be taken over, you can still generate high returns even if a small proportion get taken over.

Other investors settle for a less ambitious strategy of investing in companies after they have become targets in acquisitions, hoping to make money as the transaction price is finalized or from a bidding war (between two acquirers).