David Kuo: Get in there early before takeover mania begins

Charlie Bean, the Bank of England's deputy governor, has urged consumers to whip out their wallets and "spend for Britain".

While people are a little reluctant to heed his advice, cash-rich businesses are visibly putting their war chests to use. Unilever has just announced that it will spend £2.3bn to buy Alberto Culver, the maker of VO5, TRESemmé and Nexxus. The deal represents about 80 per cent of its existing cash pile.

Private equity firms Apollo and CVC Capital Partners hope to snaffle Brit Insurance for about £870m. Travis Perkins is awaiting regulatory clearance to complete its purchase of BSS Group, and chicken restaurant Nandos will buy Clapham House, the owner of Gourmet Burger Kitchen, for £30m.

News of a takeover can be music to the ears of stock market investors. It usually means that shares in the target company jump. When Landmark Group announced that it would buy Carluccio's, shares in the Italian restaurant chain immediately soared 47 per cent. However, to capitalise on takeovers, investors often need to get in before there is the faintest whiff of a buyer. Some investors believe they have the skills to second-guess possible takeovers.

Target companies are likely to be small players in industries where economies of scale are important. A good example would have been television programme-maker Shed Media, whose productions include Waterloo Road and Bad Girls, which is now owned by Warner Bros.

Businesses that have undergone boardroom reshuffles may be considered likely merger and acquisitions prospects too. For instance, the departure next year of Henri Termeer at Genzyme, an American biotechnology company, may signal a takeover. There have also been top-level changes at some of the UK's biggest banks. The high-level departures that have recently been announced at HSBC, Barclays and Lloyds Banking Group may indicate a pre-emptive strike by the banks to consolidate and relocate.

There is little doubt that many companies have come out of the recession in good shape. They have cut costs, reduced wage bills, paid down debt and boosted cash reserves. Many are quite reasonably looking to spend some of their cash piles. However, investors who are hoping to cash in on merger mania need to be careful. Just because a business looks ripe for a takeover does not necessarily mean a bid will happen. When investing, make sure that the underlying business is sound. After all, predators will be looking for the same thing too if they are going to stump up a substantial premium.

David Kuo is director of financial advice site fool.co.uk