Nasdaq Stock Market, Inc. (NDAQ:NDAQ) took a more hostile stance in its bid for the London Stock Exchange today, refusing to raise its bid higher than $5.3 billion unless the LSE's board accepts a friendlier approach or another bidder emerges. Moreover, they appealed to shareholders by stating that if they received support from just an additional 20% of the outstanding shares, they would alter the offer to "unconditional" (making it a hostile bid). The LSE quickly responded today by saying they would issue a statement to shareholders soon explaining why they rejected Nasdaq's buyout offer. Currently, Nasdaq owns approximately 30% of the LSE, giving it significant leverage over other potential bidders. This, combined with the fact that the financing required on this transaction would total more than $5.03 billion, make the probability of a significantly increased bid rather unlikely. Shareholders may also get a little nervous if the transaction fails since the company nearly doubled this year, thanks in part to the M&A speculation surrounding the exchange. Regardless, these are definitely two stocks to keep an eye on between now and January 11th (when the offer expires).

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Nestor Inc. (NDAQ:NEST) has been seeing an increasing amount of open market insider buying lately (revealed in Form 4 filings with the SEC) ahead of its quarterly earnings release. The trend continued today as the company's CEO, William B. Danzell, disclosed a 20,000 share purchase valued at almost $28,000, bringing his stake up to 10,069,396 shares. Yesterday, the company's director, Michael C. James, also disclosed purchases totaling 20,000 shares, bringing his stake up to 331,641 shares. There were several other recent open market purchases by these two earlier this year, each totaling around 20,000 shares. The buying began just after the company transferred its listing to the Nasdaq Capital Market and announced that it was cutting 20% of its workforce in an effort to reduce current operate expense levels and focus on the company's operations on program delivery and support. It appears that management is confident that the increased liquidity of the Nasdaq Capital Market combined with their efforts to reduce costs will help turn the company around after its drop from $4 earlier this year to just $1.35 now. It is also worth noting that much of management holds many out-of-the-money stock options, which should motivate them to do anything they can to increase the share price. This makes NEST a stock worthy of our watchlist.

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Six Flags, Inc. (NYSE:SIX) revealed their game plan for 2007 today, in which they announced deals with Thomas & Friends, The Wiggles, Tony Hawk, mtvU, Cold Stone Creamery and Heinz. But perhaps most notably, the company announced that it would reach a decision on potential asset sales by the end of the year and added that if the parks are sold it will be strictly as ongoing concerns. Six Flags had said that it was considering the sale of some of its parks in an effort to reduce is $2.2 billion in debt last year; however, many are skeptical that the the company will be able to receive a bid high enough to meaningfully reduce the company's debt - a number that may need to be as high as $800 million. This skepticism comes after the company's unsuccessful attempt to sell itself last year along with a rumored $650 million offer for six properties from MidOcean Partners and theme-park operator Herschend Family Entertainment Corp - a number far less than expected.

With shares already down 20% this year, investors are becoming increasingly restless. Investors were hoping for a clean turnaround after Syder, the company's largest investor, won a three-month battle with former CEO Kieran Burke for control of Six Flags last year. However, shares have only continued their decline with the recent quarter still showing decreases in net income and revenues across the board. Management insists that this is a "transition year", and the situation would improve through 2007. If the asset sale is successful in attracting meaningful bids and management is able to reduce the debt load and turn around the company, Six Flags could see significant share appreciation. This makes SIX a stock worth watching over the following year.

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Applebee’s International (NDAQ:APPB) may find itself under fire after Breeden Capital Management LLC announced that they would be nominating four of their own candidates to the company's board of directors. The hedge fund insists that this action is necessary due to the board's disregard of shareholder interests and company's long term underperformance. It is important to note that Breeden is run by Richard Breeden, who is a former chairman of the U.S. Securities and Exchange Commission. His fund is very well regarded and experienced in these kinds of situations.

Why are they targeting Applebee's? According to a letter attached to the fund's 13D/A filing with the SEC:

"During the three years ended December 1, 2006, the price of Applebee's shares fell from $26.13 per share to $22.34, a decline of 14.5%, while total shareholder return fell 13.4%.(1) Applebee's performance in total return to shareholders during this period ranked 13th worst out of 14 comparable public companies. (2) During this period other metrics of operating performance, growth and efficiency have declined as well.

In contrast, during this same three-year period shares of Darden Restaurants ("Darden"), operator of Red Lobster and Olive Garden restaurants, rose from $20.47 to $40.06 (up 99% in total return), California Pizza Kitchen rose from $18.40 to $31.48 (up 71.1% in total return), and Brinker International, operator of Chili's, rose from $22.24 to $30.36 (up 38.3% in total return). If Applebee's shares had matched Darden's share price performance record during this time, shares of Applebee's would be trading at more than $50 per share, and the company would have created substantial new shareholder wealth. Instead, the aggregate value of Applebee's shares has fallen by hundreds of millions of dollars.

We have communicated proven ideas for maximizing Applebee's return on invested capital and shareholder value to your management team. When we did so, it was our hope that the new management would welcome ideas on how to correct the slide in shareholder value as well as key operating metrics that has been going on during the last three years. We were politely received, and we were assured that many changes were being studied. We were advised to wait to see the company take action. Like other shareholders, we have been waiting to see that action, but the company has not disclosed anything of significance.(3) As demonstrated by the extremely poor third quarter results, the company continues to perform poorly. Evidently the board has not yet decided that action is required to stop Applebee's further deterioration. In this environment, we do not believe that hope is an adequate strategic plan from the board." (Read More)

The fund was also angered by a last second change in bylaws that made it more difficult to nominate candidates to the board. They elaborated in their letter:

"Last August, shortly after Breeden Capital Management informed management that our funds were significant shareholders, the board saw fit to amend the company's bylaws to institute a requirement that the company be notified nearly six months in advance of the company's annual meeting of any candidate wishing to stand for election to Applebee's board. As you know, this is a fairly unusual length of time, and it appears unrelated to any legitimate need of the company beyond entrenching board members even further than what the company's staggered board already does.

Absent this change in your bylaws, Breeden Capital Management would have had more time to watch the company's performance before making a decision whether or not to put forward board candidates. However, by your choice we must submit nominations now, or be foreclosed through the annual meeting in 2008 from having a chance for the company's shareholders to elect new members of the board. While we would have preferred to be able to continue observing the company's performance before deciding whether to submit our own candidates, the board's bylaw amendment forces us to make that decision now. As a result, we are today nominating four candidates for election to the company's board at the 2007 annual meeting." (Read More)

Finally, Breeden also revealed five changes that he would implement if elected to the board of directors:

1. Significantly reduce the number of company-owned restaurants by re-franchising a substantial number of restaurants in a multi-year program.
2. Cease all further capital expenditures to open new company-owned restaurants, and minimize capital expenditures to renovate company-owned restaurants pending their sale.
3. Reduce overall expense levels, especially in corporate level overhead, and dispose of non-core assets.
4. Use excess cash generated from these steps and improved performance to increase the return of free cash flow to shareholders.
5. Improve various governance practices, including reducing the number of insiders on the company's board, precluding former CEOs from continued board service, strengthening independence requirements, eliminating the personal use of corporate aircraft and abolishing your staggered board.

In the end, to paraphrase the fund's letter, all shareholders would benefit from a stronger, independent board that is able to evaluate and act upon opportunities for creating value. If the proposed nominees are elected to the company's board of directors, it could mean significant share appreciation over the long-term for the company's shareholders. This makes APPB a stock to keep a close eye on into their 2007 elections.

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Continental Airlines (NYSE:CAL) and UAL Corp (NDAQ:UAUA)
SEC Filings Watchlist
The Wall Street Journal reported today that Continental and UAL were exploring a possible merger, that would result in one of the largest carriers in operation. While talks have been going on for some time, there are reports that they are accelerating in light of US Airways' (NYSE:LCC) hostile bid for Delta Airlines (OTC:DARLQ). Skeptics, however, point out that Northwest Airlines' (OTC:NWACQ) "golden share" in Continental could prove to be a significant roadblock to any such merger.

The Goldman Sachs Group, Inc. (NYSE:GS)
8-K Filing by the Company
Goldman Sachs announced yet another quarter of record earnings today, with Q4 EPS of $6.59 versus a consensus of $6.00. Meanwhile, revenues were $9.41 billion versus a $8.81 billion consensus. According to the CEO: "We are very pleased with this year's performance. The breadth of our franchise, the diversity of our businesses and the performance of our people enabled us to serve our clients around the world." Shareholders were expecting more, however, as the stock moved down over 1% in the day's trading.

Salesforce.com (NYSE:CRM)
8-K Filing by the Company
Salesforce.com revised its revenue outlook upwards today, citing continued momentum of their AppExchange ecosystem. The company now expects revenue to be in the range of $710 million to $720 million for its fiscal year ending January 31, 2008. On November 15, 2006, salesforce.com said that it expected FY08 revenue to be between $700 million and $710 million.

Martin Marietta Materials, Inc. (NYSE:MLM) may be a stock worth watching today after Daniel Loeb's Third Point disclosed a 5.4% stake in the company, according to a 13D filing with the SEC. Daniel Loeb and his Third Point are well known (and well regarded) within financial circles as activist investors who are quite outspoken - having called CEO's everything from "Chief Value Destroyers" to "toothless cronies". However, aside from his often entertaining (yet extremely insightful) letters, Daniel's fund has averaged an enviable 30% annualized return over the last ten years, making his fund one of the most successful on Wall Street. And with over $2.1 billion currently invested, his fund is definitely one worth keeping an eye on - especially in early stage investments like MLM (in which he only holds 5%). You can view a complete listing of their funds holdings as of November by looking at their recent 13F filing with the SEC.

Currently, Item 4 (purpose of the transaction) of his MLM 13D filing simply indicates a generic investment in the company:

"The purpose of the acquisition by the Funds of beneficial ownership of the securities is for investment. The acquisition was effected because of the Reporting Persons’ belief that the Company represents an attractive investment based on the Company’s business prospects. The Reporting Persons are engaged in the investment business. In pursuing this business, the Reporting Persons analyze the operations, capital structure and markets of companies, including the Company, on an ongoing basis through analysis of documentation and discussions with knowledgeable industry and market observers and with representatives of such companies (often at the invitation of management). Depending on prevailing market, economic and other conditions, one or more of the Reporting Persons may from time to time, among other things, hold discussions with third parties or with management of such companies (including the Company) in which the Reporting Persons may suggest or take a position with respect to potential changes in the operations, strategy, management or capital structure of such companies as a means of enhancing shareholder value. Such suggestions or positions may relate to one or more of the transactions specified in clauses (a) through (j) of Item 4 of Schedule 13D of the Exchange Act, including, without limitation, such matters as disposing of or selling all or a portion of the company or acquiring another company or business, changing operating or marketing strategies, adopting or not adopting certain types of anti-takeover measures and restructuring the company’s capitalization or dividend policy. The Reporting Persons presently do not have any plans or proposals that relate to or would result in any of the actions required to be described in Item 4 of Schedule 13D. Each of the Reporting Persons may, at any time, review or reconsider its position with respect to the Company and formulate plans or proposals with respect to any of such matters." (Read More)

Third Point averaged in at around $90 per share, meaning that they are currently sitting on a 10%+ profit on their investment; however, given the fact that this is still an early stage investment for them (only buyers since October) and given that the company is in the construction industry, Loeb is probably expecting much more significant upside on this investment with his most recent purchase on December 1st. Any changes in his position can be seen in future 13D/A filings with the SEC. This is definitely a stock to keep a close eye on in the coming months!

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Northwest Airlines Corp (OTC:NWACQ) moved higher by another 20% today as speculation of a possible buyout continues. The runup began after Owl Creek - a fund that owns 4.4 million shares of the bankrupt company - said that Northwest shares could be worth between $18 and $33 per share in the event of a buyout. Now, when a company goes bankrupt, it is not uncommon for their shares to become worthless upon emerging from bankruptcy. After all, common stock shareholders are at the very end of the bankrupcty line. So, why would anyone buy shares of Northwest then? Well, if the company can orchestrate a buyout before it emerges from bankruptcy that satisfies the bankruptcy court and debtors, then common stock shareholders could see significant share appreciation. They outlined their argument in their most recent 13D/A filing with the SEC:

"Though it is early to value Northwest for recovery purposes, Owl Creek submits that, based on Wall Street analyst reports, the trading markets value Northwest's legacy carrier peers (American, Continental, United, and US Airways) at 5-1/2 to 6 times "EBITDAR."(3) Carriers like Northwest with a higher likelihood of being a merger candidate trade for more than 6x EBITDAR and carriers with a lower likelihood of being a merger candidate trade closer to 5.5x EBITDAR. Based on similar 2007 fuel price assumptions to those underlying the comparable company valuations, Owl Creek forecasts Northwest's 2007 EBITDAR to be $2,700,000,000. Given a valuation of 6.0x 2007 EBITDAR, Northwest should have a total enterprise value of over $16,200,000,000 at the time of its expected emergence from bankruptcy protection in September of 2007. With a cash build up of over $1,000,000,000 during the remaining pendency of the bankruptcy cases, this would result in an equity value of $19.75 per share AFTER covering all claims with interest and the preferred stock.

Furthermore, US Airways' hostile offer for Delta Airlines last week -- aside from signaling directly the consolidation trend in the legacy carrier market from which Northwest's value undoubtedly will increase -- demonstrates the inherent value, recoverable by Northwest's equity holders, that a merger of Northwest with a strategic partner will create. US Airways announced that it expects the combination to generate $1,650,000,000 of annual synergies, which is 6.2% of the combined Delta/US Airways passenger sales. Assuming comparable proportional synergies to a Northwest merger with Continental (Continental Airlines is the most logical partner, but this analysis would be equally applicable to another carrier), then the synergies generated by a combination of Continental Airlines with Northwest would be approximately $1,250,000,000 annually. Valuing the company at a post-merger multiple of 5.25x EBITDAR including one half of the synergies accruing to Northwest (the other half to the merger partner) results in an implied stock price of $33.50 per share.

This is not a "what if" analysis. Experts have been calling for consolidation for some time, and US Airway's offer for Delta Airlines suggests the starting point. SEE, E.G., Benjamin Silverman and Susan M. Donofrio, TWO EVENTS MAY TRIGGER AIRLINE CONSOLIDATION THIS FALL, Cathy Financial Industry Report, September 22, 2006; Jeff Bailey, A REVITALIZED US AIRWAYS IS CREATING A MERGER BUZZ, N.Y. Times, July 31, 2006, at C2 ("The surprising early success of
US Airways Group, the result of a merger last year, has led to some behind-the-scenes talks among investors and airline executives that could lead to more industry consolidation in the months ahead"); Susan Carey and Melanie Trottman, MERGER TALKS BRING OUT FEAR OF FLYING, Wall Street Journal, April 21, 2006, at C1 ("Most airline investors agree that consolidation would be great for an industry with too many airlines chasing too few dollars"). The value of the mergers becomes immediately apparent in the change in trading prices of Delta Airlines unsecured bonds following the November 15, 2006 announcement of US Airways' offer. The trading price of Delta Airlines bonds increased by fifty percent in the week after the announcement, and Delta's board has neither accepted nor closed that transaction yet. Owl Creek believes, in fact, that Northwest is a MORE strategic asset to an acquirer than Delta Airlines due to its strong international network and its "Golden Share" in Continental Airlines." (Read More)

Meanwhile, Owl Creek has also petitioned the U.S. courts to create a Shareholders Committee to represent preferred and common stock shareholders in bankruptcy court. If granted, this representation would greatly improve the chances of shareholders receiving something after the company emerges from bankruptcy. Owl Creek gave six reasons for this (which they elaborate upon in their 13D/A filing):

• the Debtors' cases are large and complex;
• the Northwest stock is widely held and actively traded;
• the interests of Northwest's shareholders are not otherwise adequately represented;
• the Debtors do not, under reasonable (non-strategic) valuations, appear to be "hopelessly" insolvent;
• Owl Creek's request is appropriately timed based on the status of the Debtors' cases; and
• the necessary costs do not significantly outweigh the concerns for adequate representation.

Combined, Owl Creek believes that the company has a good chance of being able to emerge from bankruptcy with enough capital to retain preferred and common stock. Moreover, they insist that in the event of further industry consolidation, the company could see a large enough premium to pay of debtors and have plenty left over for common stock shareholders. While the stock is obviously extremely risky at this point, any further news of a buyout or creation of an equity committee could give some meaning to the stock's current valuation. This makes Northwest a good stock to keep an eye on over the next couple of months.

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Taro Pharmaceuticals (NDAQ:TARO) shares moved higher today on news that the company was in talks with the Ofer Fund. The Yedioth Ahronoth daily is reporting that the buyout would be worth around $450 million or $15.36 per share - a 38% premium over Friday's closing price. The company has not reported receiving or accepting an offer as of yet.

Taro Pharmaceuticals is an Israeli generic drug producer that has been struggling since 2004, with its stock down over 80% since those highs. Since then, the stock has struggled with poor financials and a possible delisting from the NASDAQ. Only recently did the company receive a filing extension on November 16th. The stock moved up 6% in today's trading on the news. It is important to remember that no offer has been made or accepted yet, and given the fact that Taro has not filed its 20-F (foreign annual report), we do not have a good picture of the company's financial condition. The deal could still fall apart if it is contingent upon a review of these financials (due diligence). But regardless, this is definitely a company to keep an eye on in this very strong M&A market.

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Allegiant Travel Company (NDAQ:ALGT)
S-1 Filing by the Company
Allegiant Travel began trading this friday on the Nasdaq at $24.01 per share, above its initial range of $15 to $17 per share. Allegiant Travel is a leisure travel company focused on linking travelers in small cities to world-class leisure destinations such as Las Vegas, Nevada and Orlando, Florida. This stock is definitely one to watch as the U.S. IPO market has been on fire as of recent.

Catalina Marketing Corporation (NYSE:POS)
SEC Filings Watchlist
The company announced on Friday that they had hired Goldman Sachs to explore a possible sale of the company. Goldman Sachs will begin soliciting expressions of interest from interested third parties and present these offer to the board of directors to consider. The company had already attracted up to six private equity offers in the $30 range. The stock moved up over 15% on Friday to close just under $30 per share.

HEELYS, Inc. (NDAQ:HLYS)
S-1 Filing by the Company
HEELYS began trading Friday on the Nasdaq at $33.08, after pricing above its initial IPO range of $16 to $18. HEELYS is a designer, marketer and distributor of innovative, action sports-inspired products under the HEELYS brand targeted to the youth market. This stock is definitely one to watch as the U.S. IPO market continues to suprise to the upside.

Northwest Airlines Corp. (OTC:NWACQ) moved over 34% higher in today's trading on news that the company hired Evercore Group LLC for "strategic advice". We discussed a possibility of a merger in a previous article on this blog, where we noted that Owl Creek Asset Management - a 5% holder in the company - said that the company could be worth as much as $19.75-$33.50 per share in the event of a merger with Continental Airlines (NYSE:CAL). This estimate was based on the cost savings and other synergies that could benefit both companies, which Owl Creek explained in its 13D/A filing with the SEC. Meanwhile, Jon Ash, president of InterVistas-GA2, a Washington consulting firm said, "Northwest would be a good fit for Delta Air Lines Inc. or US Airways Group Inc. because they have complementary route systems". We first started watching this stock at $3.49 per share back on November 22nd and now the stock trades at $4.44 - this is still a great stock to keep an eye on as more information becomes available!

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