Gambling on a Takeover

The British are coming, the British are coming! At least that's what Washington Mutual (NYSE:WM) and its shareholders might be screaming. However, instead of an expression of warning, this is more likely an exclamation of joy. On Friday, shares of Washington Mutual rocketed up to the tune of almost 9%. That will put a smile on shareholders' faces for sure.

Behind the jump are rumors that the largest bank in Britain, HSBC Holdings (NYSE:HBC), has its sights set on America's savings and loans giant. Once investors caught wind of HSBC's plans to expand its U.S. operations, Washington Mutual appeared the ideal target. With the acquisition of Washington Mutual, HSBC could place itself among the top five U.S. banks and become the probable leader in mortgage lending. Talk about a British invasion. The Beatles have got nothing on that!

However, prospective investors should be very cautious about news floating around the rumor mill. The important thing to remember here is that this is a rumor and until it is substantiated, you're taking a real gamble. Neither company on either side of the pond has actually said anything about this deal becoming a reality. Last August, Fools were warned about this same company when we lambasted management to stop hyping the stock. This time, it seems analysts and investors are doing their own hype job.

If I were considering investing in Washington Mutual, I would be sure to base my reasoning on the soundness of a company's business. Allowing the possibility of an acquisition to serve as the sole or main reason for an investment is a dangerous proposition, especially if the deal ends up falling through.

However, if you have valued the business as a good investment and then it does indeed get acquired, that can merely serve as the icing on the cake. On the flip side, if the acquisition never materializes and you haven't properly evaluated the business, you could be left holding a real clunker.

Have something you'd like to share about this situation? Have you done your homework and want to check your answers? Talk it over with other Fools on the Washington Mutual discussion board.

Fool contributor Jason Matthews doesn't really know all that much about Paul Revere, but he does enjoy Beastie Boys' "Paul's Boutique" album. He owns no shares of the companies discussed in this article.