(FORTUNE Magazine) – The Wall Street investment banking houses are humming into the wee hours, ever grander deals are grabbing ever grander headlines, and, says tobacconist Nat Sherman Inc., sales of premium cigars like Macanudos are up 35% so far this year. No doubt about it: The merger and acquisition business is back in swing. The value of announced M&A transactions has reached $221 billion so far in 1993 -- already higher than at any time since 1989. Moreover, marriage fever is nearly always catching. Look what happened when Bell Atlantic proposed to Tele-Communications Inc. Sibling rivalry has other Bells wanting to ankle down the aisle with cable outfits, and BellSouth did so the very same day. So where does this leave today's investors? Well, in an awkward spot. Common wisdom has it that takeovers are not a game for small fry. Risk arbitrage is certainly best left to professionals (though individual investors can participate -- see box). But without getting into arbitrage, you can still catch enough of a glow from the current fireworks in telecommunications, health care, and banking to put a shine on your portfolio. The safest and probably most efficient way is to buy a mutual fund that can place its bets on a variety of companies, some of which may ultimately be taken over. Unfortunately, there aren't too many of these funds specializing in the currently hot communications stocks. The Fidelity Select Developing Communications Portfolio invests in cable, cellular, and communications technology companies both in the U.S. and abroad. Year to date, it is up 32.5%, having risen 17.2% last year; it charges a 3% load. Pony up $250,000, and Gabelli Asset Management will spread your money around what it calls its Gabelli Interactive Couch Potato accounts, which invest in communications stocks like AT&T and Disney. Since investors started plopping their money down in July, the sofa spud accounts have risen on average some 14%. Never slow to ride a wave, Gabelli is bringing out the Gabelli Global Telecommunications fund and the Gabelli Global Entertainment and Media fund. Both are no-load for now. Should you decide to pick your own takeover targets, here are some rules to follow. Buy several stocks and only those you'd be happy to own regardless of whether they are acquired. Don't worry about getting in too early or waiting awhile for a merger to be consummated. It can make sense to hold the stock for 12 months in order to qualify for capital gains tax treatment. Almost all the public cable companies have been bid into the stratosphere following the offer for TCI, and you had best stay away from them. Two possible exceptions, provided you are not in a hurry to see action, are Jones Intercable and International CableTel. Jones controls much of its subscriber base through a series of partnerships with other investors, so any acquisition would be a drawn-out, convoluted affair. That's why the shares typically trade at about 50% of the value of the underlying assets, while the competitors' stock trades at 70%. In addition, an affiliate company, Jones Spacelink, owns a controlling interest. Investors may have to wait for an acquisition; yet, says analyst George King of Conseco Capital Management, ''it's probably the cheapest cable stock out there.'' International CableTel runs systems in the United Kingdom, where the urge to merge hasn't been felt yet. But, says Fidelity portfolio manager Philip Barton, ''the cable companies there will eventually have to develop economies of scale.'' Eventually, too, these communications monoliths are going to need programming, which makes a company like BET Holdings a potential target. BET, which grew 20% last year, owns Black Entertainment Television, which shows music videos, comedy shows, and news. The beauty for whoever buys it -- or any other programmer, for that matter -- is that every additional subscriber an acquirer can sign up for those services is extra money in the bank. Says managing director Marvin Shapiro of investment bankers Veronis Suhler & Associates: ''It costs no more to feed a program to ten million subscribers than it does to five million.'' There are opportunities in broadcasting too. Silver King Communications owns 12 television stations serving eight of the 12 largest markets. After its merger with Home Shopping Network, Barry Diller's QVC will have an option to acquire a controlling stake in Silver King, and Diller might decide to buy out the rest of the shareholders. But Silver King investors could make out even better if he doesn't, by hanging around and watching him use the company to help build the fifth television network he is said to envision. One way to find merger opportunities outside communications is to look for fat. Any bloated industry is ripe for consolidation. And nowhere, if you listen to Hillary and Bill, is there more avoirdupois than in the health care system. Indeed, Columbia Healthcare will become a $10-billion-a-year behemoth, assuming its merger with Hospital Corp. of America is completed. Merck is paying $6 billion for mail-order drug distributor Medco Containment Services, and Hoechst Celanese will lay out $546 million for 51% of Copley Pharmaceutical, a generic drugmaker with $52 million a year in sales and $12 million in profits. The hunt for the next Copley has driven the prices of many generic drugmakers into vertigo territory. But the takeover virus hasn't infected the big drug stocks yet, and Larry Feinberg, who runs Oracle Investors, a hedge fund specializing in health, predicts, ''Over the next six months we'll see a wave of consolidation of the ethical drug companies.'' But what's true in telecommunications is also true in health care: The possibility of a takeover should be an added benefit but never the main reason to buy the stocks. ONE IDEAL TARGET is Eli Lilly, Feinberg thinks, because Lilly's broad product line would be ''a perfect fit with Merck, or even Bristol-Myers Squibb or Pfizer.'' Lilly makes both psychiatric drugs like Prozac and antibiotics that Merck is missing in its medicine cabinet. The cost savings of such a combo would be enormous. Lilly, like most drug companies, spends over 40% of revenues on sales and marketing, research and development, and overhead. Were Merck to buy it, Feinberg predicts the combined company could cut that spending by at least half. For many of the same reasons, Feinberg says, competitors could be checking out Warner-Lambert and Upjohn. Feinberg also believes that the market is ''in the early stages of a major rally in biotech. Takeovers by drug companies could trigger a huge move.'' The big pharmaceutical outfits need those tiny biotechies to produce the innovative and relatively price-insensitive wonder drugs. The best approach is to buy a basket of biotech stocks, since specific acquisition targets are still hard to discern. The Oppenheimer Global Bio-Tech fund, which has a 5.75% load, and Fidelity Select Biotechnology, 3%, offer the purest plays in this industry. The constant flurry of bank mergers over the past two or three years is likely to turn into a blizzard. There are just too many banks. Over the next ten years, security analyst Thomas Hanley of CS First Boston expects, the total number of U.S. banks will fall from the current 11,363 to under 3,000. That's a lot of mergers -- more than two a day, to get the job done in the time Hanley has allotted.

Which banks will dine, and which will be dinner? Investors who want to cash in should buy mutual funds with fat positions in the smaller banks that look like plats du jour. Among the funds is the John Hancock Freedom Regional Bank fund, with a 4% load, and two closed-end offerings, First Financial fund and Southeastern Thrift & Bank fund. Closed-end funds typically trade at a discount to net asset value, but if there is a run on bank mergers, the funds could possibly go to a slight premium, which is added leverage for the investor. James Schmidt of John Hancock Advisors runs the Hancock and Southeastern funds, and he recommends the Southeastern when it trades at a 10% discount or more. Otherwise, take your pick. FOR THOSE hankering to try their own hand at stock picking, the best - strategy -- yet again -- is to buy a basket of five or six smallish, well-run banks and wait for the inevitable. Hanley's favorites either dominate or are strong in their markets. They include Cullen/Frost Bankers, the largest independent bank in Texas, and Victoria Bankshares, another lone-star bank. These he expects to be acquired sometime next year. For those prepared to wait longer, Hanley also recommends BayBanks in Massachusetts and New Jersey's UJB Financial. If you want to get paid while you wait, invest in higher-yielding stocks like Meridian Bancorp and Independence Bancorp, both of Pennsylvania. They pay around 4%. And that's more than you'd get from a six-month CD. If trying to guess it right among all these stocks strikes you as a little daunting, there is one investment you might consider that is a proxy for the entire merger boom. It is Morgan Stanley Group, one of the few publicly traded investment banks with a big M&A department. The days when banks would rake in $50 million or more from a transaction are over, because today's well-heeled buyers don't need junk financing. But First of Michigan analyst Perrin Long figures M&A fees will contribute 10% to 12% to Morgan's pretax profit this year. That figure could rise to 35% or 40% of profits if more companies start to hear those wedding bells.

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