Last week in Financially Fit we began a discussion of special situations - unusual, but frequent events that offer investors unique opportunities to profit. 

In this issue, I want to cover two additional special situations:  Mergers and acquisitions, and stock splits. 

In 2006, global mergers were up 38%, to $3.79 trillion, according to Thomson Financial. That's a tremendous increase and what makes it even more remarkable is that the dollar value of the deals even surpassed by 11% those executed in the year 2000. That was the best year ever for M&A but it also came to symbolize excessive prices paid for unrealistic valuations - primarily, due to the outrageous behavior of technology stocks and the investors chasing them. 

In the United States, $1.6 trillion in deals were struck in 2006, just short of 2000's record-breaking $1.7 trillion level. 

Here are last year's largest deals: 

Technology came back into the spotlight in 2006, as technology-related mergers rose by 48%, to $244.1 billion, according to Innovation Advisors. And like many great stock stories of 2006, tech M&A was the strongest outside the United States, especially in Europe, China, and other regions in Asia. International tech deals increased by more than 48% last year, after growing 42% in 2005 and 28% in 2004. 

The majority of the rest of 2006's deals were made in the telecom, utilities and energy, real estate/property and financial sectors. 

Like 2005, cash was king in 2006. Dresdner Kleinwort reports that some 70% of last year's total M&A deals were for cash, compared with the 10-year average of 40%. 
Some M&A watchers are a little concerned that this plethora of cash deals may signify too much money chasing too few deals, perhaps stimulating prices to a too-lofty level. Others are concerned that debt levels are once again rising, with high yield debt increasing by 52%, to $183.3 billion last year, according to Thomson.  

However, while deal volume and debt levels have substantially risen, prices being paid are still considerably lower than those in the year 2000. As well, deal premiums remain reasonable and the catalysts for the mergers appear to be actual, identifiable synergies, rather than the loose patching together of companies for nonsensical, unrelated purposes that we saw during the tech craze.  

And since most are cash deals, we are not seeing the overpricing that occurred in 2000 as companies returned to the markets again and again, issuing shares to purchase other businesses, driving up the stock of all concerned parties.  

Furthermore, many deals were made in the non-public markets, with private equity buyers, comprising almost 17% of all 2006 transactions, and double their 2005 activity, according to Thomson. Last year, private equity raised around $400 billion for M&A, and at the beginning of 2007, had some $700 billion more ready and waiting for new acquisitions. 

The merger attraction has been sweetened by the Sarbanes-Oxley Act of 2002, with its requisite onerous financial reporting requirements and expenses, inciting smaller companies to be more receptive to buyout overtures. 

M&A prognosticators are looking for 2007 to be another stellar year. Thomson reports that through April 20, 2007, $566 billion worth of deals have already been announced. Pundits predict that information technology, banking, health care and manufacturing will all be busy making deals. 

Many investors have made plenty of money by being in the right place at the right time, when one of their holdings is bought by another company. But it isn't luck that places them at this happy junction. It's the same old story: buy companies that are fundamentally strong with superb growth potential and a unique niche or growing market share. And in many cases, you will find that another company will frequently come along and scoop them up. Result: a nice premium on your shares. 

If the M&A market isn't for you, there is another special situation that often provides opportunity for investors to take home some profits. In 2006, 37 companies from the S&P 500 split their stock, some 40% lower than the average number of splits since 1979. 

The reasons are several: 

• Company executives are looking at the market with cautious eyes, afraid that market declines might take their split stock prices too low.
• High flying share prices including Google, Berkshire Hathaway and Research in Motion have become status symbols on Wall Street, attracting investors with a certain cache.
• The process of splitting a company's stock is not inexpensive: legal fees, new certificates and bank expenses all add up.
• Although many stocks will see their shares zoom ahead after a split, Zacks reports that stocks that did not split in 2006 rose 20% compared to those that did split, which rose just 1%.

However, if the market continues to post new records, we expect to see a return to a period in which the number of companies announcing stock splits will climb. After all, historically, stock splits have been followed by significant appreciation in share prices. Here's why: 

• Investors generally see stock splits optimistically - and for a good reason. University of Illinois Finance Professor David Ikenberry reports that in his study of more than 20 years, the shares of companies that split their stocks outperformed the market by an average 8% in the year following the split and at last 13% in the next three years.
• Companies usually split their stocks when their fortunes are rising, usually portending share price appreciation.
• Often when announcing a stock split, companies will simultaneously report higher earnings, sending their shares up.
• Because companies would rather not have low share prices, a split can imply that management is confident that share price rises are sustainable.
• Psychologically, the resultant lower share price following a split will most likely make the shares more attractive to investors.

Therefore, investors on the lookout for stock splits are often rewarded. 

However, caution should be the byword for investors seeking the unique opportunities resulting from M&A, as well as stock-split events. It is still of utmost importance to first ensure that the company in whose shares you are interested is in a strong, fundamentally-sound, well-run business, whose shares look attractive, standing on their own merits. After that, any premiums accrued to the shares due to M&A or split activity will just be extra money you can take to the bank.