(MONEY Magazine) – CORPORATIONS IN THE U.S. ARE caught up in the biggest frenzy of mergers and spin-offs since the late 1980s. The value of mergers announced in 1995 alone figures to top $325 billion, far above the previous record of $247 billion in 1988.

All this wheeling and dealing gives small investors an opportunity to earn as much as 55% over the next 18 months without taking big risks. In fact, since we think the overall stock market probably won't make much headway in 1996, deal stocks may offer the year's best chance for double-digit returns.

To earn them, however, you need a fundamentally different strategy from the one followed by deal-stock investors in the 1980s. Back then, companies would buy troubled businesses just to break them up and sell off the pieces at a profit. Thus aggressive investors could buy cheap stocks that were likely takeover targets and make a fast buck.

Today, however, corporations generally acquire or spin off businesses to improve their long-term growth prospects. Your best strategy therefore is to invest in the companies doing the deals so you can benefit from the firms' bigger future profits.

Here's a quick look at eight major deals announced in 1995; the shares all trade on the New York Stock Exchange. Five of the stocks offer potential returns of 20% or more over the next 18 months. (For the record, I'm a shareholder in both AT&T and Time Warner, MONEY's parent company.)

Westinghouse Electric (ticker symbol: WX; recently traded at $16.75; 1.2% yield). With David Letterman regularly sniping at CBS management, the network's woes have been widely publicized. The result is that investors have underestimated the potential payoff from Westinghouse's purchase of CBS for $5.4 billion in cash.

As MONEY's Wall Street columnist Junius Ellis reported in December, however, the merger will create a broadcasting powerhouse, with 15 TV stations that are able to reach 33% of U.S. homes.

In the past six weeks, Westinghouse stock has risen nearly $3 to $16.75. But the shares still have plenty of growing room. "The heat is on management to raise the share price; otherwise, the company could be taken over," says analyst Nicholas P. Heymann at NatWest Securities in New York City. He notes that the value of Westinghouse's nonmedia assets is nearly enough to pay off all the company's debt of roughly $8 billion. (Plans to sell more than $3 billion of those assets were announced by Westinghouse in early December.) Heymann figures that as a debt-free media firm, Westinghouse would easily be worth at least $26 a share, 55% more than the current price.

ITT (ITT; $125; 1.6%). Only final Internal Revenue Service approval, which could come at any time, is needed before $28 billion ITT breaks up into three separate companies. "All three pieces are likely to do well," says analyst Jack Blackstock at Donald Lufkin & Jenrette in New York City.

The most glamorous new company, with annual revenues of $5.9 billion, will include hotel and casino operations and New York City's Madison Square Garden. That stock could trade as high as $60. The second business will consist chiefly of the $12.1 billion Hartford insurance company; it could go for about $57 a share. The remaining piece, $9.5 billion ITT Industries, will include auto- and defense-related businesses and could be worth $28.

All together, Blackstock thinks shares of ITT's pieces are currently worth $145. And he sees that total value rising to more than $160 over the next 18 months, a gain of 28% from today's share price for the undivided company.

Time Warner (TWX; $39.75; 0.9%). Many investors have been unnerved by the uncertainty that is surrounding Time Warner's plan to pay $7.5 billion in stock for the 82% of Turner Broadcasting that twx doesn't already own. Among the potential obstacles is a lawsuit by U S West, which maintains that the deal would violate the terms of the agreement under which the regional phone company bought 25.5% of Time Warner's movie, programming and cable-TV businesses. In addition, the Federal Trade Commission has not yet decided whether the proposed new $19 billion company would pose antitrust problems. Nonetheless, says analyst Dennis McAlpine at Josephthal Lyon & Ross in New York City: "We think the deal is going to go through."

Some analysts assess Time Warner's assets at $60 a share or more. "Time Warner stock is cheap whether the company buys Turner or not," says analyst Michael Kupinski at A.G. Edwards in St. Louis. He and McAlpine both think the stock could top $50 within 18 months, a 26% gain.

AT&T (T; $65.50; 2%). Investors have greeted AT&T's decision to break up the $85 billion company with great enthusiasm, boosting the stock price to $67. At that level, analysts at Merrill Lynch and Lehman Bros. think the shares are now fully valued. As Money reported in November, however, analysts see further gains over the next 12 to 18 months.

In simplest terms, the company intends to split into three separate businesses. AT&T, which would retain long-distance service, cellular telephone and credit-card operations, would have estimated 1996 sales of $54 billion and could be worth as much as $58 a share. Sales at the still unnamed telephone equipment division could rise from $20 billion to more than $23 billion, chiefly because AT&T's competitors would no longer be hesitant about buying the firm's products. That new company could go for as much as $18 a share. Finally, the troubled $7.5 billion computer division, currently named Global Information Solutions, could be worth $4 a share.

Assuming the breakup moves ahead as planned, a share of today's AT&T could be worth as much as $80 by mid-1997. That would represent a 22% gain for current shareholders.

Chemical Banking (CHL; $62.25; 3.2%). After Chemical Banking merged with Manufacturers Hanover in December 1991, Chemical stock doubled in two years. One reason: The new company slashed costs more than $750 million by meshing its operations and closing redundant branches.

Now Chemical is hoping to repeat its success by acquiring Chase Manhattan for $10 billion in stock. The new company would be the largest bank in the U.S., with total assets of more than $300 billion. "If you want to buy only one money center bank, this one would be our top choice," says analyst George M. Salem at Gerard Klauer Mattison in New York City.

The new firm plans to cut costs by as much as $1.5 billion. That could boost the stock's earnings an additional 15% over the next five years, says analyst Ronald I. Mandle at Sanford C. Bernstein in New York City.

The analysts believe the stock could gain 21% to $75 within 18 months.

Union Pacific (UNP; $68; 2.5%). The company's proposed acquisition of Southern Pacific for $3.9 billion in cash and stock would again make Union Pacific the largest U.S. railroad with annual revenues of more than $11 billion. More important, though, Union Pacific has said that cost savings and incremental revenues from the deal could total as much as $750 million a year. "The merger will allow Union Pacific to utilize its track and locomotives more efficiently as well as reduce back-office expenses," says analyst William Fiala at Edward Jones in St. Louis.

Analyst Cornelius Sewell at Argus Research in New York City figures that Union Pacific stock could gain 18% to around $80 within 18 months.

Minnesota Mining & Manufacturing (MMM; $66.75; 2.8%). In mid-November, $18 billion 3M announced it would shut its video- and audiotape operations and spin off its $2.3 billion laser- imaging and data-storage businesses.

Some analysts calculate that the current shares are worth as much as $70, based on a $65 value for the core company, plus $4 or $5 for the spin-off. But analyst Alex Henderson at Prudential Securities in New York City thinks the total value could be higher. His reasoning: Once 3M sheds its weakest operations, the remaining company could be worth as much as $72 or $73 a share. Meanwhile, the data storage and imaging operations will be able to improve their profits by trimming overhead after they are on their own. The spin-off therefore could go for $5 or $6.

Henderson sees the value of 3M shares plus the spin-off gaining 17% to $78 within 18 months.

Disney (DIS; $62.50; 0.6%). Disney's proposed acquisition of Capital Cities/ABC for $18.8 billion in cash and stock has made the company analysts' long-term favorite among media stocks. "It will be a $16.5 billion production-distribution machine delivering 20% compound earnings growth through the end of the decade," says analyst Tom Wolzien at Sanford C. Bernstein in New York City.

The only trouble, notes analyst Jill Krutick at Smith Barney in New York City, is that "Disney stock has already had a terrific run"--up more than 30% in the first 11 months of 1995. Even so, Krutick sees the stock reaching the low $70s in the next 18 months, a gain of about 15%. "It's going to be a marriage made in heaven," she says. "Both companies needed each other."

Reporter associate: Duff J. McDonald