First, a quick definition of two types of mergers:
1. Horizontal - This is when two similar companies merge.
2. Vertical - This is when companies in different stages of the "supply chain" merge. An example would be if a paper mill buys a timber company.
Vertical mergers tend to be very company-specific and trigger less industry-wide stock market speculation. There are a number of reasons to both get excited and to be wary when talks of horizontal mergers surface. When you see an industry perform well in the stock market post-merger announcement, one major reason is speculation that more mergers will follow. This is [theoretically] positive for three reasons:
1. Typically, buyout prices (the price you would receive as an existing shareholder when your company is purchased) tend to be at a premium to the "market price" of the company. The market price of a company is equal to the number of shares outstanding (float) multiplied by the price per share; essentially it's the price at which you can sell your stock.
2. Mergers (horizontal) tend to be positive for an industry is because, once completed, there are fewer companies in the industry. This turns companies into "price-setters" as opposed to "price-takers". In other words, the more companies there are selling the same or similar products, the less power each of them has to increase their prices. As the number of companies selling decreases, the "supplier power" increases. In other words, profitability has the potential to increase as competition is reduced.
3. "Synergy" (from the Greek word "synergo") is the word used to describe what occurs when parts together equal more than their sum individually. In the context of mergers/aquisitions, it is typically used to describe the cost savings that can occur when two similar companies combine. Typically their are redunancies in the cost structure that can be eliminated. There may also be "economies of scale," which is a term that is used to describe the increasing profitability of larger volume.
While any specific merger likely has very specific reasons for exciting investors, those reasons are more than likely founded in one or more of the above concepts.