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Cramer: Aggressive M&A signals shares undervalued

(Click for video linked to a searchable transcript of this Mad Money segment)

Few things excite Jim Cramer more than M&A. And after a string of mergers, he thinks investors may be looking at significant higher valuations, at least in certain areas of the market.

That's because Cramer says no investor knows an industry better than its leading players. And if big companies are willing to pay significant premiums to make an acquisition, Cramer takes it to mean that they see value that the Street has missed.

Examining Tyson's $63 per share bid for Hillshire Brands, which topped last week's $55 per share bid from Pilgrim's Pride, Cramer thinks other businesses in the same sector may be undervalued, too.

With many Street pros believing that Kraft's Oscar Mayer unit could be the next target of M&A, Cramer broke down the numbers. "I had come up with a $21 billion valuation for this one division, which I talked about on Friday's "Mad Money". But after Tyson's final bid for Hillshire, today, I now think my Oscar Mayer valuation is too low by a couple billion dollars."

And the phenomenon is hardly limited to the food space.

Miguel S Salmeron | The Image Bank | Getty Images

"Today, we learned Merck is paying $24.50 a share for Idenix, a 238 percent premium to where the stock went out yesterday," Cramer said. Therefore, Cramer thinks other smaller biotech stocks may warrant higher valuations. "Because of their robust pipelines, I think Seattle Genetics and Isis might both be worth a heck of a lot more than I thought, based on what Merck just paid for Idenix."

Cramer said the move by Analog Devices, which will pay $78 per share in cash to acquire Hittite, is another development that speaks volumes. It represents a premium of about 29 percent to Hittite's Friday close of $60.56 per share; however Analog, the acquirer, rallied too. "Does that mean we need to rethink the worth of TriQuint? How about Cypress Semi?" They, too, may warrant greater premiums.

Also, Carl Icahn's new stake in Family Dollar suggests to Cramer that others in the retail space may be undervalued. "Rival Dollar General rallied 7 percent based on speculation that it could merge with Family Dollar. Therefore, I have to wonder if Wal-Mart gets involved here. It wants to be in smaller configurations. Maybe it buys both?"

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All told, Cramer thinks the developments are telegraphing a message. "It says to me that it might be time to get more aggressive about the valuations of companies based on what they might be worth to potential acquirers. After all, better than anyone else, it's the companies that really know their industries."




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