McDonalds Corp. (NYSE:MCD) found itself back in activist investor Bill Ackman's crosshairs after the company's move to reduce its holdings in Chipotle Mexican Grill through a stock swap. The company disclosed in an 8-K filing earlier today that Ackman's Pershing Square Capital Management would increase their McDonald's common stock holdings by almost $800 million after the swap.

Last year, Ackman pressured the company to spin off 65% of their owned restaurants in a stock offering, but backed off after McDonalds agreed to $1 billion stock buyback and other measures designed to increase shareholder value. Ackman's fund was also actively involved with Wendy's (NYSE:WEN) restructuring, which included the spin off of their Tim Horton's (NYSE:THI) chain. With these new shares, many investors are speculating that the activist investor will step in again to encourage the company more actively unlock shareholder value.

Whether this materializes or not, when an activist hedge fund discloses an $800 million stake in the company it's something worth watching closely.

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Tim Hortons Inc (NYSE:THI)

Gateway Inc. (NYSE:GTW) announced today that it would reject John Hui's $450 million bid for the retail operations of the company. Management and the board of directors maintained that the transaction would not be in the best interest of shareholders. Shortly after the announcement the stock moved down 2.5% to settle at $1.95 (where the buyout premium is now at 11%). The company did not address a seperate offer by Hui to potentially acquire all outstanding shares in the company at an unspecified price.

Earlier this year, the company retained Goldman Sachs as a financial advisor to help the company enhance shareholder value. Moreover, a recent 13D filing with the SEC also revealed that Gateway stock has been heavily accumulated by Harbert Management Corp. According to the filing on August 21, 2006, the fund "submitted a letter to the Issuer's Chairman and interim CEO to offer the board and management assistance in their efforts to enhance shareholder value". The filing does not indicate that the hedge fund would seek any extraordinary measures such as the liquidation of the company, sale of the company, or other similar measures.

With the possibility of a future bid for all of the company's shares by Hui, along with the restructuring help of Harbert and Goldman Sachs, Gateway is certainly a company to keep a close eye on as they attempt to improve shareholder value.

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Medtronics Inc. (NYSE:MDT) has found itself abound in rumors recently. The company told shareholders at last Thursday's annual meeting that the company was not for sale, despite rumors that Johnson & Johnson was preparing a bid. Medtronics CEO Art Collins insisted that the company had not been seeking a buyer; however, despite this rebuke, the possibility for a takeover bid still exists. The idea of a possible buyout came as a result of the company's sliding stock price, which dropped from $60/share earlier this year down to its current range in the $40s. The company attributed this drop to the industry-wide recall of cardioverter defibrillators along with reduced coverage of medical devices by government programs and lower ICD revenues. Typically, when companies experience such drops, they become vulnerable to buyout offers and even hostile takeover bids.

Interestingly, on August 28th three company directors purchased or acquired large blocks of shares at market close. These transactions included the acquisition of over 1,500 shares, an open market purchase of 1,000 shares, and a string of open market purchases totaling 25,000 shares. The transactions all occurred on August 24th - the day of the annual meeting. Are these insiders simply making regular purchases based on the notion that their company will perform well in the future, or do they know something? Although there is an absence of call options (which are the most telling indicator that mangement knows something that would affect the price in the short-term), the purchases do raise question especially since this is the first instance of open market purchasing (as opposed to acquisition) in several months. This is definitely a stock to keep an eye on...

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Bally Total Fitness (NYSE:BFT) recently announced, in an ammended 13D filing with the SEC, that they had signed a confidentiality agreement with activist hedge funds Liberation Investments and (earlier) Pardus Capital. According to the most recent filing:

"On August 28, 2006, a representative of LIGLLC executed a confidentiality agreement (a copy of which is attached hereto as Exhibit 99.34, the “Confidentiality Agreement”) with the Company pursuant to which the Company agreed to make available to LIGLLC and certain of its representatives on a confidential basis certain information (the “Evaluation Material”) of the Company, including, without limitation, information relating to the Company’s business, products, markets, condition (financial or other), operations, assets, liabilities, results of operations, cash flows and prospects."

So, why do they want this information?

"Following their review of the Evaluation Material, the Reporting Persons may determine to attempt to arrange or participate with third parties in an extraordinary corporate transaction with respect to the Company, such as an acquisition, a sale of all or substantially all of the Company’s assets, a reorganization, a recapitalization, or a significant debt or equity investment."

These hedge funds have a long history with Bally: Last year, the two hedge funds launched a proxy battle to gain control of the board - a battle eventually led to ousting of then-CEO Paul Toback and the appointment of two Pardus-supported board members. The company then made an unsuccessful attempt to put itself up for sale. Meanwhile, Bally's shares plummeted to under $3/share from a high of $9/share just a month earlier. This freefall was the product of poor operating results posted at the end of July along with the uncertainty surrouding the company's future.

Now, with these latest confidentiality agreements, the hedge funds will have more indepth access to the company's financial condition to either put it up for sale or begin a restructuring plan. Given the fact that Bally's stock is near a 52-week low right now, a possible buyout is the most likely of the two. If the hedge funds are successful, it could be a substancial gain; however, there is always the risk that the hedge funds will simply bail on the investment and cut their losses (like Pirate Capital did to OSI not long ago!). So far investors have applauded these announcements, bringing the stock up nearly 15% since the original announcements. Though this is purely speculative at the moment, it is a great stock to keep an eye on and perhaps play with longer-term options.

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Educate Inc. (NDAQ:EEEE) announced yesterday in an 8-K filing with the SEC that they had sold off their Education Station business segment in an $18 billion deal. The business segment, which helped public schools comply with the No Child Left Behind Act, was sold for $6 million with another $12 million being paid for software licensing and support. The business unit has long been a drag on the company's earnings despite increasing revenues. The stock moved up 11% in today's trading as investors applauded the move, which should help the company follow through with its turnaround plans that caused so much difficulty last quarter. The stock is currently being heavily traded by technical analysts; however, if the turnaround is successful, it may become a decent play for fundamental investors as well.

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New Frontier Media Inc. (NDAQ:NOOF) announced yesterday in an 8-K filing with the SEC that activist hedge fund Steel Partners had expressed interest in leading a management buyout. According to the filing:

"At the regularly scheduled Board of Directors meeting of New Frontier Media, Inc., on August 15, 2006, Mr. Warren Lichtenstein of Steel Partners II, L.P., was provided, at his request, an opportunity to address the Board of Directors. Mr. Lichtenstein expressed an interest in leading a 'management buyout' of the shares of New Frontier Media, Inc. Mr. Lichtenstein expressed a willingness to pay a premium over the market price but declined to state the price per share or the amount or range of premium over market price that he is prepared to offer."

Two days after this announcement on the 15th, there were five insiders who obtained 25,000 call options at $7.80 (found in Form 4s). Note that call options are short-term derivatives used to take advantage of short-term price movements. This turned out to be a great buy as the stock moved up around 10% after the 8-K was released yesterday. This just goes to show how important it is to keep an eye on management activity, especially when activist hedge funds are involved.

So, is the stock still a good deal? Steel Partners likely anticipated this announcement and price movement, and therefore are probably willing to pay a premium to even this price if the transaction goes through. The stock is still cheap, trading at just 16x earnings with solid growth, good margins, and a strong cash position. This is definitely a stock worth watching, and perhaps getting involved with using an options play once things get a little clearer.

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Double-Take Software, Inc. took one more step towards becoming a public company with an S-1 filing on August 10th. The company would be the third data company to IPO this year following CommVault and Riverbed. Double-Take provides affordable backup and data recovery software to small to midsized enterprises - a market that is predicted to grow at a 25% annualized rate.

Will the company be a good buy? Well, the company has increased its revenues from $7.1m in 2001 to over $40m in 2005, although it only recently turned a profit. The company also acquired a software distributor (Sunbelt System Software) a few months ago to help expand. Sunbelt had been a long-time partner, authorized training provider and reseller for Double-Take software. The acquisition provided the company with a well qualified support and training staff as well as a stronger physical presence in Europe.

In addition to strong fundamentals, the company is also in an interesting position in their market. They are very small compared to larger competitors like EMC, and with the recent M&A activity many people thought that Double-Take would take the acquisition route instead of IPO'ing. Depending on their final valuation, the company might eventually become an acquisition target as a public company given their small market cap and strong market position.

Overall, the pricing on the IPO remains to be seen, so it is not possible to fully speculate as to how undervalued the stock is or whether or not it would be an acquisition target; however, it is definitely an IPO worth keeping an eye on.

PW Eagle Incorporated (NDAQ:PWEI) manufactures and distributes polyvinyl chloride pipe and fittings and polyethylene pipe and tubing products used for turf and agricultural irrigation, natural gas transmission, water wells, fiber optic lines, electronic, and telephone lines. The company has triped in price since mid-2005 as a result of a restructuring, refinancing, and strong operating results. However, their strong balance sheet and cash flows attracted some unwanted attention...

The company revealed in a 13D filing last week that activist hedge fund Pirate Capital had increased its stake in the company from 17% to just over 21%. Pirate also bought almost $300k worth of additional shares two days later. Why? In their original SC13D filing on March 10th, Pirate said:

"The Reporting Persons originally acquired Shares for investment in the ordinary course of business because they believed that the Shares, when purchased, were undervalued and represented an attractive investment opportunity. The Reporting Persons intend to encourage the Issuer to actively pursue strategic alternatives to maximize shareholder value, including the potential sale of the company."

In the same filing, Pirate also announced its intention to nominate its own directors to the company's board during their 2006 annual shareholders meeting. Moreover, they demanded to see the company's books and shareholders on record - a move which usually indicates that the fund is going to solicit a proxy battle. This move was supported by another activist hedge fund - Caxton Associates - who also has a large interest in the company. PW Eagle, eager to avoid a proxy battle, quickly agreed to expand the board of directors and give both hedge funds a seat on the board. This immediately resulted in a special committee appointed to "explore strategic alternatives" for the company, headed by Pirate's own Zachary George. And it was this committee that likely pressured the company into instituting the $40m share buyback, which was recently announced in the company's 10Q filing with the SEC.

Is this buyback all that the hedge funds were seeking or is there something more? Many traders are speculating that something else is in the works. Caxton recently acquired a lot of call options, which are instruments that make the most money on short-term price movements, not long term investment. This, combined with Pirate's 5% increase in ownership, indicates a lot of conviction by those closest to the company. What exactly will happen remains to be seen, but one thing is certain - PW Eagle is definitely a stock to keep an eye on.

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The Warnaco Group, Inc. (NDAQ:WRNC) is the most recent target of the Barington Group, an activist hedge fund seeking to "unlock shareholder value" through any means possible. In their 13D filing with the SEC on the 21st, Barington disclosed a 5% stake in the company and outlined the issues it wanted the company to address:

• the improvement in execution by the Company’s senior management team and oversight provided by its Board of Directors in light of a string of what the Reporting Entities believe to be recent operating disappointments stemming from (a) the recently announced financial restatement caused by accounting issues at the Company’s Chaps division and swimwear segment and the resulting Securities and Exchange Commission informal inquiry, (b) disruptions and excess costs associated with poor implementation of SAP at the Company’s swimwear segment, and (c) missed revenue growth and gross margin targets;
• a substantial reduction in equity grants, including stock options and restricted stock, which have averaged 5.0% annually or a staggering 17.6% cumulatively of the Company’s shares outstanding over the past three and one-half fiscal years;
• the improvement in gross and EBITDA margins, which currently trail peer averages by approximately 800 and 600 basis points, respectively, through a reduction in SG&A and corporate expenses and better merchandising;
• the disposition of non-core brands and licenses, especially in underperforming divisions of the Company's intimate apparel and swimwear segments; and
• the exploration of strategic alternatives, including, without limitation, the possible sale of the Company.

The company's stock rose slightly on the news, settling around $19 per share. The company is trading at a discount with a 0.82 PEG ratio and a 12x forward PE ratio. The company is also solid fundamentally with solid brand names like Speedo, Calvin Klein, Chaps, Nautica, JLO and Ocean Pacific. Any of the actions mentioned above would likely boost the price of this stock significantly.

Currently, these are just words; however, Investors should watch for future Form 4 and 13D filings from Barington as the fund positions themselves to convince management to make these changes happen. Investors should also watch for a response from the company's management and/or any meetings with the Barington Group. Warnaco is definitely a stock worth keeping an eye on as this story unfolds.

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Google Inc. (NDAQ:GOOG) made an interesting filing on July 20th that is only now starting to garner attention after the WSJ covered it. The filing is a 40-APP, which is an "application for exemption and other relief filed under the Investment Company Act of 1940". Although the document is only a automated notification generated as a result of a paper submission, it does highlight Google's concerns.

The Investment Company Act requires any company that holds more than 40% of their worth in securities to disclose their holdings - as they are considered in the eyes of the SEC as an investment company/fund. Google currently has just over $14 billion in assets with almost $6 billion of that in securities - unfortunately for Google, that's 42%. The company also has $4 billion in cash! Google currently holds primarily U.S. Governement bonds, but is seeking to move its money into higher yielding municipal bonds and high-grade corporate bonds. Notably, companies like Yahoo and Microsoft obtained similar exemption which allowed them to utilize higher yield investment tools.

It is unclear as of now whether or not Google will be granted the exemption. If they are not, a look into their investments might tip investors and their competition off as to future acquisitions and other intentions. What does this mean for Google investors? Well, if they are able to gain the exemption, it will mean increased investment returns for the company. These returns could be substancial given the large amount of cash and securities that the company has invested. If they are unable to gain the exemption (which was Yahoo's problem before they tried a second time), they may be forced to reveal their equity holdings, which would give investors a good look into possible acquisitions and areas of interest for Google. Either way, this is definitely something to watch.

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