MAIR Holdings Inc. (NDAQ:MAIR) found itself under increased scrutiny today after 5.3% holder Riley Investments expressed concern that the company was not receiving fair value for its subsidiary Mesaba Airlines in connection with Northwest Airlines' (OTC:NWACQ) bankruptcy/acquisition. While talks between the two companies are still in very preliminary stages, Riley expressed concerns that relationships between the two companies might jeopardize shareholder interests.

The hedge fund changed its filing status from 13G to 13D today, issuing a letter to management explaining their position:

"Riley Investment Management holds approximately 5.2% of the outstanding shares of MAIR Holdings. As we have previously discussed, we are aware of acquisition discussions between Northwest Airlines and Mesaba Airlines, a wholly owned subsidiary of MAIR, and have noted Northwest’s most recent amended Schedule 13-D. We believe the $145 million claim amount proposed by Northwest is grossly inadequate. We believe that Lloyd Miller, who holds approximately 4.56% of the MAIR stock, Palmyra Capital Advisors which holds approximately 1.8% along with several other shareholders, share our concerns.

We believe that for meaningful discussions on claim values or acquisition values to occur between Northwest Airlines and Mesaba, it is necessary that MAIR’s independent shareholders participate. Northwest, MAIR’s largest shareholder with approximately 28% of the outstanding shares (not 39.5% as claimed in Northwest’s 13-D filing), has a clear conflict of interest in the negotiation process and the current MAIR directors may have long-standing relationships with Northwest due to its stake in the Company. To assure fairness in both substance and procedure, it is imperative that the interests of other significant shareholders are actively involved in the negotiation and approval of any transaction. The board cannot assume that Northwest will negotiate for the company or its shareholders’ best interests. Nor can it be assumed that, if the company’s shareholders are asked to approve any transaction with Northwest, Northwest, as a MAIR shareholder, will vote its shares in the best interest of the company or the company’s disinterested shareholders. Shareholders of MAIR should remember that Doug Steenland, president of Northwest Airlines, appears to have ignored similar conflict of interest issues when he served on the board of MAIR during the negotiation of Mesaba’s current ASA and also oversaw MAIR’s $30 million investment into Mesaba. Both the ASA and $30 million investment were completed less than three weeks prior to Northwest Airlines filing for bankruptcy and under Mr. Steenland’s watch as a MAIR board member.

To ensure the fair treatment of the company’s shareholders, any deal between Northwest and the company or its subsidiary should be approved by a majority of the company’s disinterested shareholders. We hope you concur. We are offering to play a constructive role in this process in the effort to receive fair value for our ownership of Mesaba. Because we represent a significant percentage of MAIR’s outstanding stock not held by Northwest and are not conflicted with regard to the negotiations with Northwest, we believe our participation would improve the negotiating process. We note there are currently three vacancies on the board and wish to enter into immediate discussions regarding placing our representatives on the board. 

Given the announcement by Northwest of its plans, and the need for a timely response, we would be interested in meeting with you soon to discuss our views. If you prefer, we will seek to include other significant holders in such a meeting.

If our concerns are not addressed, we reserve our rights to protect our interests and those of other holders by all reasonable methods, including intervention in the Mesaba or Northwest bankruptcy proceedings, or seeking to convene a shareholder meeting which would amend the MAIR bylaws to require approval by holders not affiliated with Northwest, and possibly also seek to enlarge the MAIR board in a manner that would let shareholders fill the new seats created by the expansion.

We hope that we can resolve these concerns amicably in the interest of all shareholders." (Read More)

Clearly there is a strong relationship between MAIR and Northwest that might be reason enough for an independent shareholder committee to evaluate the value of Mesaba in the event of a buyout. This deal is one worth following closely, as any deal would mean significant share appreciation for MAIR and perhaps even Northwest.

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Alltel Corporation (NYSE:AT) jumped over 4% in today's trading on rumors that the company could be the subject of a bidding war between private equity groups and other interested parties. Rumors began after the Wall Street Journal broke the news that various private equity groups were exploring the possibility of leveraged buyout of Alltel. While an Alltel spokesman refused to comment, the WSJ said that the company was attractive due to its low debt and strong balance sheet - enabling its bidders to utilize a substantial amount of debt in the event of a leveraged buyout.

Meanwhile, Stifel Nicolaus added to the conversation by noting that a buyout has been a key part of the company's strategy since it spun off its wire line assets earlier this year. The analyst also said they believed the company was a very attractive takeover target not only for private equity, but also larger competitors Verizon Wireless (NYSE:VZ) and Sprint/Nextel (NYSE:S). Overall, Stifel Nicolaus said it valued the company's shares as high as $85 in the event of a leveraged buyout, and would continue to retain its buy rating on the stock with a price target of $68 per share.

In the end, we know that Alltel could see a bidding war between private equity and other larger carriers; it would be a strategic acquisition for larger competitors like Verizon or Sprint, while it's low debt makes it attractive to private equity groups with deep pockets. Combined, these factors make for an interesting story that is definitely worth following in the coming months!

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Cypress Semiconductor (NYSE:CY) found itself under pressure today from Chapman Capital, which holds around 1% of the company's stock. The well known activist hedge fund sent a letter to the company's board demanding that they consider split off their Sun Power (NYSE:SPWR) stake and attempt to sell their core business via a leveraged buyout (LBO). Chapman said that based on prior estimates that the company obtained, along with their current cash position and Sun Power stake, the company's stock is worth $22 per share - a 35% premium over the current market price.

Since Chapman's stake was under 5%, he chose to issue this recommendation via a press release. The letter is rather lengthy (read it here), but here's the synopsis:

"Chapman Capital L.L.C. today announced that it has notified the Board of Directors of Cypress Semiconductor Corporation (NYSE: CY) of its recommendation that Cypress reorganize via a split-off and subsequent going-private LBO transaction. A letter dated today from Robert L. Chapman, Jr., Managing Member of Chapman Capital, has been sent to Cypress's full Board of Directors and is attached hereto.

Mr. Chapman commented, 'Like other significant owners of Cypress Semiconductor, Chapman Capital has recommended that its Board of Directors re-engage Credit Suisse to effect a corporate reorganization that separates Cypress's core semiconductor operations from its controlling stake in SunPower Corporation.' Regarding Chapman Capital's growing concerns regarding relatively immaterial Cypress share ownership by its Board of Directors, Mr. Chapman stated further, 'Cypress's core semiconductor business, which Mr. Rodgers founded nearly 25 years ago, deserves a much higher valuation than what it was ascribed the day Mr. Rodgers took it public two decades ago. Mr. Rodgers has stated publicly, 'you and I are going to make as much money as fast as we can on this.' Cypress's Board of Directors, despite their insignificant percentage ownership of Cypress, should expect that we are going to hold Mr. Rodgers to this promise.'"

The letter presents solid arguments for a $22 per share price as well as evidence that the M&A market still exists for companies like CY. Combined, these factors make Cypress a stock definitely worth watching into 2007. The stock moved up over 3% today on the news.

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Electro Scientific Industries Inc. (NDAQ:ESIO) is a company that provides high-technology manufacturing systems to the global electronics market, including advanced laser-based systems that are used to microengineer electronic device features in high-volume production environments. Recently, ESIO found itself under pressure today from 9.5% shareholder, Nierenberg Investment Management, to issue a $4 special dividend - a request that came after the company's stock price has remained stagnant at around $10 for several years.

The fund attached a letter to their 13D/A filing with the SEC that detailed the company's excellent market position and prospects, but expressed concerns over the company's stagnant share price. According to the letter:

"Anticipating that Electro Scientific Industries' (ESI) Board of Directors may meet before the company announces second quarter earnings, we respectfully request that ESI pay a one time dividend of $4.00 per share to all shareholders. Paying such a dividend would demonstrate powerfully ESI's commitment to maximizing both shareholder value and return on equity (ROE). We see no adverse consequences from such a dividend. (To be clear, we do not favor a share repurchase or an ongoing dividend. All we seek is a one time dividend similar to that paid by Microsoft. In our experience, repurchase and ongoing dividend programs are often more symbolic than real.)

When we visited you October 5th, after the company's annual shareholder meeting, you put your finger on exactly what has been troubling us about ESI: the stagnation of its share price. We discussed three things which you and the company could do to increase director ownership of ESI shares. Unfortunately most of what we discussed has not occurred, at least not yet, and what has occurred has been minor. Aggregate outright ownership of ESI shares by its eight outside directors has risen from zero to only 4,000 shares, an average of only 500 shares per director. Since we see little evidence that ESI is requiring outside directors to have meaningful "skin in the game," we have decided to stop pushing it. We will focus, instead, on the fundamental issue: the stagnation of ESI's share price, much of which we attribute to sub-optimal allocation of capital.

ESI's share price has fluctuated around $20 per share for a decade. One can contend persuasively that ESI deserves better than being a stock market "flat-liner." You and the other outside directors bring strong industry experience. ESI has a solid management team. We believe that Nick Konidaris is a terrific CEO and we have been positively impressed in our discussions with Tom Wu and John Metcalf, both of whom Nick hired. ESI enjoys leading market shares in its major businesses, where it solves the problems of sophisticated global customers. ESI is good corporate citizen in Oregon. Recently, ESI has introduced exciting new products, reinvigorating its existing businesses, and, we hope, launching several promising new ones. And the company enjoys a fortress balance sheet, fed and protected by a business model which should generate positive operating cash flow, even during downturns.

But ESI's balance sheet also depresses ROE and may encourage loose spending. 38% of ESI's current share price sits in cash and marketable securities, long awaiting deployment, earning only a 4% pre-tax return. For more than six years, ESI has carried over $4 per share in cash and marketable securities on its balance sheet. Since the beginning of 2000, ESI's total cash and marketable securities has nearly quadrupled, through a secondary offering and retained earnings. ESI's most recent balance sheet showed $7.33 in cash and marketable securities per issued and outstanding share.

We believe that just two factors drive a company's long term share price: growth in earnings per share and its ROE. While ESI's recent investments in R&D are beginning to drive higher sales and profits, it will be very difficult for ESI to reach and sustain a mid-teens ROE with cash-bloated shareholders equity of nearly $400 million. Even if ESI were to earn $1.00 per share in calendar 2007, this accomplishment would only drive a 7% ROE, half the level we consider appropriate for an enterprise with ESI's management quality and market share. We are convinced that unless ESI pays out a large special dividend, the company cannot reach and sustain an acceptable ROE. And, without a strong ROE, ESI's share price will continue to languish.

One of a Board's primary responsibilities is to be the ultimate allocator of capital. We are convinced that when a company retains too much cash, and does not use it for a long time, its other allocations of capital may be distorted by its wealth, further diminishing investor returns. For example, companies flush with cash may pour too much money into real estate, such as manufacturing facilities, laboratories, and offices. The current trend toward outsourcing makes such investments particularly ill-timed. Companies may sink too much money into expensive software system deployments, without adequate payback. They may even begin to act like diversified investment funds, putting the shareholders' money into other operating companies. The lesson of our experience is that cash is spent most wisely when there is less of it.

Paying out $4.00 cash per share will not stress or impair ESI. The company remains profitable; it is further reducing costs; and it should generate profits and positive operating cash flow in most foreseeable circumstances. Paying a special cash dividend should not jeopardize employee retention or customer or vendor relationships. Nor would paying such a dividend put ESI's growth strategy at risk. Even after paying out a $4.00 per share cash dividend, ESI would retain nearly $100 million of cash and $211 million of net working capital and have zero debt. Should the company find an acquisition, it still would have plenty of dry powder. Moreover, to fund a large acquisition, the company could issue stock to pay the seller; it could sell additional equity in a private placement or a secondary offering; and it could borrow.

You may recall from our prior discussions with you and management that our concerns about capital allocation and ROE are neither new nor casual. We also have been sharing these concerns with some of the company's large shareholders and some of the analysts who follow the company. Seven investment firms own almost half the company's shares.

You can expect us to continue discussions with ESI's largest shareholders, as only five or six months remain before we must decide whether and how to bring our concerns before the next annual shareholders meeting. It is possible that we may press for the dividend in several different ways, such as by introducing a resolution at the annual meeting or even by nominating our own outside director candidates. Our strong preference, like yours, would be to conserve time and money by avoiding an electoral contest, but we raise these possibilities here today to demonstrate the gravity of our concern and our willingness to invest in preparing, if necessary, a campaign of persuasion.

In conclusion, we want to reiterate our enthusiasm for ESI and note that our concern about allocation of capital is an issue which transcends the company. Too many public technology companies today are cocooned in green blankets. In allocating capital they often are fighting the last war, driven by memories of an era when growth was faster and cyclicality steeper. While understandable, this mindset undervalues what ESI management has done, and is doing, to reduce cost, broaden revenues, and diminish cyclicality. It is time for ESI's Board to share the green blanket with its ultimate owners, your shareholders. We are happy to discuss this issue further with you at any time." (Read More)

This letter serves as a great overview of the company for new investors in the company as well as a compelling argument for the company to issue a special dividend. If the company is able to illustrate its willingness to do what it takes to unlock shareholder value, this stock could finally move outside of its nearly-decade-long range. Combined, these factors make ESIO a stock worth watching closely into 2007.

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Harbinger Capital indicated that it would be seeking two board seats on Openwave Systems, Inc. (NDAQ:OPWV). The activist hedge fund changed its filing status today from 13G to 13D (indicating an activist stance) and filed preliminary proxy materials to elect James L. Zucco and Andrew J. Breen to the board of directors. This news comes as OPWV is well off its 52-week highs of over $20 per share. Currently the stock is sitting at around $9.60 per share aftering moving up over 9% on this news today.

What changes would the new board push to implement? Well, according to the 13D filing:

"Establish a unified and focused "platform" vision for the Company's overall product offering with the Company's most strategic core products. Currently, the Company is supporting a very broad product line with a divergent mix of products for each customer. The Company is now in the process of creating significant new technology (OPPS and ODP) which is unproven in the marketplace and with only minor tie-ins to existing products. Perceived delays in product development and the release of these new products have caused investors to worry about the future of the Company. We urge the Company to develop a unified vision and customer message with a coherent business, market, and technology strategy. The value proposition should clearly communicate that an investment in the Openwave platform can be leveraged across multiple applications and product generations.

Prune non-performing product lines to further reduce costs. Many of the Company's aging lower-margin products no longer warrant continued investment and allocation of resources to such products prevents management, sales organization, and R&D employees from properly developing and selling new products. The Company needs to apply a specific set of investment metrics against all current and planned products and products not meeting the criteria for continued investment should be discontinued.

Immediately reduce quarterly operating expenses to approximately $50 million. Given the uncertainty of deal flow for new products as well as declining revenues and pricing pressure for legacy products, the Company's revenue is more likely to remain in its current range for the next several quarters and there must be some contribution to margin generated by more significant reductions in operating costs. We believe that the Company can make this reduction through office consolidation, reduction in redundant headcount, sales reorganization, and other administrative cost reductions.

Immediately commence a significant share repurchase program. As of September 30, 2006, the Company had cash and cash investments totaling $505.1 million and net cash of approximately $355 million. While we recognize that a strong balance sheet is needed in order to compete for business in the Company's end markets, we feel strongly that the amount of cash currently on hand could only be justified by management's desire to make acquisitions. While we recognize that acquisitions are an important part of any growth strategy, Harbinger Capital Partners do not believe funding large-scale acquisitions would be a prudent use of this capital at this time. Harbinger Capital Partners would recommend that the Board take steps to implement a $200 million share repurchase program or dutch auction tender, reducing current shares outstanding by approximately 25%. This would leave the Company with net cash of approximately $155 million (gross cash of approximately twice the outstanding debt) which should provide ample financial flexibility." (Read More)

Clearly these are changes that would be beneficial for shareholders. Streamlining the company's product lines and operating budget would save millions of dollars, while a share repurchase program would increase the value of the stock by reducing the float by a quarter. If Harbinger is successful in installing its board members, we could see significant share appreciation from these levels over the medium to long term. Consequently, OPWV is definitely a stock worth watching going into 2007.

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IPSCO Inc. (NYSE:IPS) today revised its Q4 EPS outlook to $3.00 to $3.10, excluding any impact of the NS Group acquisition, foreign exchange gains or losses or effects of share price volatility, and assuming an effective tax rate of 36%. The company had originally estimated that earnings per share, on the same basis, would be in the range of $3.30 to $3.50 per diluted share. The Wall Street consensus stands at $3.50.

J.C. Penney Company, Inc. (NYSE:JCP) announced the termination of Catherine West as executive vice president and chief operating officer, effective immediately. West was just named COO of J.C. Penney in June, coming from Capital One (NYSE:COF), where she served most recently as president of one of its largest divisions, the U.S. Card business. West was also named one of Fortune's 50 Most Powerful Women.

Apple Computers (NDAQ:AAPL) is under pressure after CEO, Steve Jobs, was given 7.5 million stock options in 2001 without the required board authorization. The report said records showing a full board meeting had taken place to approve the award was later falsified. The SEC said it will evaluate this and other evidence as it decides whether or not to pursue a case. Shares of AAPL traded lower in today's session.

Ultra Petroleum Corp. (AMEX:UPL) -- UPL is down from a high of over $70 per share ealier this year to its current levels of around $48. Despite this drop, the company is still currently trading above enterprise value with a PEG of 1.21, which is slightly below the industry average.

CNX Gas Corporation (NYSE:CXG) -- CXG is a new public company trading nearly even since its IPO, currently sitting around $25 per share. The company is trading above its enterprise value, but has a PEG of around 0.98 - lower than the industry average.

XTO Energy Inc. (NYSE:XTO) -- XTO has been rangebound throughout this year, currently trading around $47 per share. The company currently trading well below enterprise value with a PEG of just 0.66 - substantially lower than the industry average. This makes XTO one of the cheapest companies in the oil and gas sector.

EOG Resources, Inc. (NYSE:EOG) -- EOG is off its 2006 highs of around $80 per share, currently standing at $63 per share. The company is trading just about at enterprise value with a PEG of 1.33.

Range Resources Corp. (NYSE:RRC) -- RRC is currently trading above the major moving averages at around $27 per share. The company is trading below enterprise value with a PEG of right around 1.15, making it a relatively attractive company from a value perspective.

Occidental Petroleum Corp. (NYSE:OXY) -- OXY is currently trading above its yearly lows of around $40 per share, currently sitting at close to $60 per share. The company is trading slightly below enterprise value with a PEG of 1.09.

China Netcom (NYSE:CN) moved up more than 14% today on rumors that the company could be bought out by China Unicom (NYSE:CHU), even though both companies immediately dismissed claims of negotiations between the two companies. Meanwhile, the broader Hong Kong market also continued its rally, moving to record highs today. Many attribute these moves to recent rallies in the Chinese domestic market combined with new favorable tax policy that would institute a unified flat tax rate of 25% for foreign and domestic companies.

Other stocks experiencing a rise in recent weeks include China Life (NYSE:LFC), Ping, The Industrial and Commercial Bank of China, and many others on the HK exchanges. Overall, Chinese companies (and their ADR counterparts trading on the NYSE) continue to perform extremely well.

ProQuest Company (NYSE:PQE) may get some much needed turnaround help after the Shamrock Activist Value Fund disclosed a 6.6% stake in the company. The activist hedge fund gave few details as to its plans in its intial 13D filing with the SEC; however, the fund has traditionally taken an active stance in its investments when appropriate. This event is significant because it is an initial sign of buying by a knowledgeable hedge fund while the company its near its 52-week low.

ProQuest Company is a publisher of information solutions for the education, automotive and power equipment markets. The Company provides products and services to its customers through two business segments: ProQuest Information and Learning (PQIL) and ProQuest Business Solutions (PQBS). PQIL is a provider of content to schools, academic institutions and public libraries while PQBS develops and deploys parts and service information products, and dealer performance applications for the automotive market. The company has suffered through 2006, dropping from a high over $30 per share to its current levels of around $10 per share. This comes after the company has experienced heavy losses and an ongoing accounting investigation, which could result in restatements from fiscal years 2001 to 2004. While these restatements have yet to be published, the company said that it expects earnings to be substantially lower.

So, is PQE a buy at these levels? Well, the company did recently sell off its business solutions division for over $500 million, which will give the company a boost in cash and allow it to focus on its core competencies. Moreover, Shamrock's involvement with the company will likely result in a faster turnaround and better returns for investors. And many argue that the drop from $30 to $10 is a deep enough discount to justify the risks associated with the retracement; however, without specific numbers, it is impossible to come up with a solid valuation. Consequently, it may be best for investors to wait on the sidelines for the retracement numbers before investing.

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Sempra Energy (NYSE:SRE) increases their 2006 EPS guidance, to exceed $4 per share. The increase from the previous per share estimate of $3.50 to $3.70 is due primarily to increased profitability at its commodities business. The consensus stands at $3.66.

InfoSonics (NDAQ:IFON) shares are trading higher, almost 44% today, after announcing the company will be distributing handsets for LG Electronics in the Caribbean and select countries in Latin America. InfoSonics has already received approval, certification and purchase orders from carriers in the region and will be delivering its first shipments in the coming weeks.

Inverness Medical Innovations, Inc. (Amex:IMA) and The Procter & Gamble Company (NYSE:PG) have signed a definitive agreement to form a 50/50 joint venture for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products outside of the fields of cardiology and diabetes. Both stocks were up today.  

Cadmus Communications Corporation (NDAQ:CDMS) and Cenveo, Inc. (NYSE:CVO) have entered into a definitive merger agreement for Cenveo to acquire Cadmus in an all-cash merger at a price of $24.75 per share. The total value of the transaction, including Cenveo's assumption of Cadmus' debt, is expected to be approximately $430 million at closing.