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A big business merger was announced this week, and you are here to walk us through it this morning.

Mellody: It is certainly a big deal, Tom! Kraft and Heinz, two giants in the consumer packaged goods sector, are going to merge to create the world’s fifth largest company in the food and beverage space. Kraft foods, based in Chicago, is a public company while ketchup maker H.J. Heinz Co. has been owned for the past two years by 3G capital and Berkshire Hathaway following a takeover. The combined company will have revenue of about $28 billion, and is expected to have a valuation of over $100 billion by 2017.

Why did these companies merge?

Mellody: There are a number of reasons. First of all, there are many efficiencies that can come out of this. Both Berkshire Hathaway and 3G have said that these two companies have synergies that can be exploited, and the merger will reportedly save around $1.5 billion in annual costs by the end of 2017. In addition, the deal is expected to help Kraft expand sales of its brands in foreign markets as it takes advantage of Heinz’s distribution channels overseas. However, I think the key to the deal is that the new arrangement will allow these companies to rethink their current product offerings. At present, Heinz and Kraft are struggling to keep up with evolving consumer tastes. In the U.S. and globally, consumers are moving toward healthier options, and you can bet that Warren Buffett and 3G Capital will be pushing the new company to confront these challenges.

In terms of mergers and acquisitions, is this the first of many to come in 2015?

MELLODY: I do think that we will continue to see brisk pace in M&A in 2015, building upon the banner year we saw in 2014. According to Bloomberg’s global M&A market review, North American deals increased by almost 55% in 2014, compared to the year before. There are a few reasons to think that this will continue. First, we have seen a surge in American companies bringing cash back to the U.S. from overseas, where many have parked billions of dollars in an effort to avoid paying taxes on it. A lot of this money is being spent on capital improvements and stock buybacks, but it can also be used for M&A activity.

Secondly, the strong dollar makes foreign companies relatively cheap. You might see more American companies looking overseas to expand their foreign presence or compliment their U.S. operations. Third, with the specter of an interest rate increase on the horizon, companies may try to take advantage of cheap financing. And finally, the American economy continues to demonstrate strong fundamentals, and consumers and companies alike are gaining confidence. Together, these provide some powerful incentives for more deals like this Kraft-Heinz deal.

 What does this mean for investors? Should we be trying to take advantage of these deals?

Mellody: Whether it is a merger, an acquisition, an IPO or a stock split, investors always get pulled into the hype surrounding the announcement. In terms of mergers and acquisitions, small investors are generally exposed to an unfavorable risk-to-reward ratio. This ratio is due to the fact that there are so many unknowns involved with these deals, including shareholder approval and regulatory approval. Both of these factors are difficult to gauge for individual investor. There are funds that allow investors to invest in multiple mergers and acquisitions, which spreads your money across many deals, which is better than one. However, I am always wary of stocks with hype around them. When considering stocks, the best strategy is to find an firm that does the legwork to find stocks that are undervalued instead of trying to catch the wave.

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