That's because mergers have several levels to them. The most obvious is that one company is buying another. If you're lucky enough to own the acquired one, your stock will go up to about the price of the final bid until the deal is done at which time the bid price is hit. If you own the acquirerer, you may see a dip in your stock unless the acquisition is determined to be immediately beneficial to earnings. Usually that isn't the case and the buyer's stock price goes down when the announcement is made. But over the longer term, if the purchase works out, the stock does better.

Behind any merger is an assumption: two companies have agreed on price and terms of a sale. That means a couple of things to investors. First is that both buyers and sellers are looking realistically at the current economic climate and agreeing that it's a good time to merge or be acquired. Both sides have an equally realistic interpretration of the times and are willing to consummate a deal. Much like homeowners who want the best price for their homes, companies want the best price. The difficulty comes in when both sides have a different view of what that should be.

The homeowner may be thinking of prices that were relevant a year or more ago, while the homebuyer may be seeing prices go down every day and think he or she is offering an outstanding bid. Companies have the same situation. Management and boards may think or see the value of their companies much differently from the buyers, believing that a bid is way undervaluing their company. The buyer will see the potential acquisition as in need of new capital, new management and other value added items that it can provide and bid at a level that takes into consideration more factors than the target company does. When both sides see the world from different perspectives, and they are far apart, no deal gets done.

But that's not happening now. Deals are getting done because companies are beginning to see the economic landscape pretty much the same way. Sellers realize they will prosper if they join forces with a stronger company. Buyers see opportunities that allow them to buy companies at realistic prices that make economic sense. When these two perspectives coincide, deals get done.

Another aspect to mergers and acquisitions that bodes well for all stocks is the financing of deals. Companies would not be out bidding for others if they didn't have confidence that debt financing is available. Very, very few major deals are done with equity and/or cash. There's almost always a high component of debt involved. And if a company can't raise debt, it won't bother to pursue any deal. Right now, that isn't the case. While the credit markets have been tight for some time, it appears they're starting to loosen and credit is available, though it would be hard to say that it's bountiful. Good deals will get done now because lenders are looking for solid investments and need good returns in a market where yields are very low. They welcome the opportunities to lend money at attractive rates on deals that make economic sense.

That suggests that lenders are beginning to thaw a little, a good sign for all borrowers but especially the stock market. If companies know the credit market is open for doing deals, they will become more active in their pursuit of prime acquisitions. That means more companies will be put into play, companies that are under-performing in the stock market. If you own one of them, your reward, if they're bought, comes quickly when a bid is announced. Since these deals are always closely guarded secrets, there's no way of knowing ahead of time which stocks will be targets, but it's a good guess that the ones with lagging stock prices, ones that don't reflect the true value of a company, will be in the cross hairs of larger buyers. Does that sound like something you own?

One more effect mergers and acquisitions have: stockholders get cash and/or stock. If they get cash, they usually re-invest it into other stocks. If they get stock, they may sell some or all of it and buy other stocks that are more appropriate for their portfolios. These deals add new buying power to the stock market.

Watch the headlines for more M & A activity. (You can follow them on our website under the Mergers and Acquisitions page at www.theonlineinvestor.com or on AOL at Keyword: oli) They are a good sign that stocks will do better, and credit will be more available, not just for companies but all borrowers.

Ted Allrich is the founder of The Online Investor, founder of Allrich Investment Management, LLC, as well as the author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he offers advice to investors who are just getting started.