Keep in mind that the halcyon days of the M&A business are long gone. In this new era of capital-markets restraint, transaction premiums are smaller and potential deals are vetted more thoroughly than Supreme Court nominations. You won't be seeing more harebrained AOL Time Warner-like (NYSE:AOL - News) marriages anytime soon.

Keep in mind, also, that we think it pure folly to speculate on M&A activity — particularly in a market like this. It simply doesn't pay. For example, investors have been betting that Charles Schwab (NYSE:SCH - News) would be scooped up by a big investment bank for years — and for years, it hasn't happened. Moreover, in the unlikely event that a buyout one day occurs, the offer might not be significantly higher than even today's sagging market price.

Nevertheless, understanding the methodology behind M&A activity can be enormously beneficial to investors. The first thing M&A specialists do when they evaluate takeover candidates is pore over the books in search of signs of value. Investors who do likewise are often rewarded for their diligence, regardless of whether or not a buyout comes to pass.

One good way to measure a company's value in the M&A marketplace is the so-called EV/Ebitda ratio. In essence, it's the ratio of a company's true takeover price to the cash it generates before it pays certain bills. The smaller the top number relative to the bottom, the cheaper the company — and the more attractive it might seem to a hungry acquirer.

Let's look at the top side of the ratio first. A company's enterprise value is its market capitalization (current share price times number of shares outstanding), plus its long-term debt, minus its cash. This number gives a truer picture of the company's overall value than market capitalization alone.

Why? Consider the example of two identical 1963 Chevy Impala Lowriders, each priced at exactly $5,000. The owner of Impala A owes $800 in parking tickets, which the buyer must assume — so the true cost for A is $5,800. The owner of Impala B owes no money, and he says there's $200 of change wedged in the seat that the buyer can keep. That means the buyer is really only $4,800 away from shifting into drive and burning some deal-consummating rubber. The same logic applies to corporate balance sheets: A company's debt and cash positions must be considered along with market cap when an acquirer weighs a buyout. That's why enterprise value, not market cap, is a company's true buyout price.

On the bottom of the equation is Ebitda, or earnings before interest, taxes, depreciation and amortization. Ebitda represents a company's earnings before it pays its borrowing fees and taxes, and also before adjustments are made for capital expenditures such as equipment purchases. Note that Ebitda says nothing about profitability or even positive cash flow. But by considering Ebitda rather than, say, net income, we've ensured that capital-intensive companies that are spending now to support future growth aren't ignored.

To find some corporate hot rods that look like good deals, we looked under the hoods of more than 8,000 companies using our stock-screening tool. First, we demanded trailing 12-month Ebitdas that were in positive territory. Next, we required that companies' EV/Ebitda ratios were less than the Standard & Poor's 500 average of 8.37 and below their respective industry averages. To make sure our survivors were improving their profitability, we demanded increasing operating margins compared with the three-to-five-year average. Finally, we tossed out companies that were smaller than $300 million (using simple market cap, which tells us size rather than value). We were left with 36 candidates.

As expected, our list was loaded with utilities, nine in all. This makes sense, considering the huge capital expenditures needed to run a large power company. For example, Duke Power (NYSE:DUK - News) spent $7.2 billion in 2002 on $15.1 billion in operating revenues. The company shows strong Ebitda of $4.4 billion for 2002, but when you take out $1.5 billion for depreciation/amortization, $1.1 billion for interest payments, $618 million in taxes and a smattering of other items you're left with just over $1 billion in net earnings for common shareholders. Likewise, AT&T Wireless (NYSE:AWE - News) made our list despite the company's huge $5 billion capital expenditure in 2002 for network improvements. But that spending, along with a projected $3 billion expenditure this year, could pay off down the road. (At least that's the goal.)

Another survivor, Adolph Coors (NYSE:RKY - News), the country's third-largest brewer, piqued our interest. Last week, Coors reported fourth-quarter earnings of 55 cents a share, up 27% year over year, but well below consensus estimate of 75 cents a share. While the company was blaming the shortfall on weaker-than-expected domestic sales, investors were busy dumping their holdings like skunky lager, sending shares to around $49 today from $59 last week. A sober look at the fundamentals, however, shows that the sell-off may have been overdone. The stock changes hands at about 10.4 times next year's earnings estimates, and with projected three-to-five-year earnings growth of a little over 11%, it trades at a price-to-earnings-growth, or PEG, ratio of 0.93, compared with 1.3 for the S&P 500 and 1.71 for Anheuser-Busch (NYSE:BUD - News), its largest competitor.