Cramer’s M&A Trading Manual

Mergers and acquisitions are back in a big way this year. During just the first three months alone, we saw $564 billion worth, which is 18% higher than the same period in 2009. That doesn’t mean every deal is good, though. So investors who want in on the action have to know the difference between the moneymakers and the money losers.

That’s where Cramer comes in. On Monday, he said he’d use the whole week to show viewers how to spot M&A opportunities while avoiding M&A mistakes.

The first thing to consider is the stock of the acquirer. Typically this company drops on any news of a deal because of the potential share-price dilution, fears the merger won’t work, the increased leverage needed to make it happen or “noise,” as Cramer called it, around the transaction’s closing. But a true sign of strength, he said, is when the stock shoots higher instead. This means the market is incredibly bullish on the takeover.

Phillips-Van Heusen made such a move on March 15, when it announced it would buy Tommy Hilfiger in a $3.1 billion deal. The stock jumped 10% soon after and is now less than a point off its 52-week high following the Federal Trade Commission’s clearance to close the deal.

PVH, which already owns Calvin Klein, Van Heusen, Arrow and Izod, “is a master of taking existing brands and growing them to new heights,” Cramer said, and he expects no different with Tommy Hilfiger. The combined company should generate nearly $5 billion in total sales, making it the fourth-largest apparel player behind VF Corp , Polo Ralph Lauren and Esprit. And Phillips-Van Heusen will add to the enormous market share – 45% of the dress-shirt market in department stores; over 50% of the department store neckwear business – it presently controls.

Also, PVH said the acquisition will add 20 cents to a quarter in earnings per share to its 2010 fiscal year, and 75 cents to $1 for the first full year. And the company has the chance to leverage Tommy’s strong European presence to launch its other brands. At the same time, Phillips-Van Heusen can use its wholesale relationships to expand Tommy here at home. Then there’s Asia, where Tommy’s footprint outside Japan is minimal. PVH could help to get sales up to $500 million longer term, Cramer said.

PVH is cheap, trading at just 12.9 times 2011 earnings, the cheapest in the group. But the stock has still run 37% since the CEO’s Nov. 24 appearance on the show. That’s why Cramer wants investors to wait for a pullback. And he thinks one is coming via a $200 million equity deal that is expected before the Tommy deal’s closing, some time during the second quarter. But he thinks it could come even sooner.

So, “Get ready for the deal now,” Cramer said.

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