Loral Space & Communications, Inc. (NDAQ:LORL) is facing an increasing amount of pressure from a large hedge fund who is now seeking to investigate a recent share purchase agreement with a board member. Highland Crusader Offshore Partners LP, a 5% stakeholder in the company, demanded to inspect books and records of the company to investigate possible mismanagement, breaches of fiduciary duty, corporate waste, and improper influence and conduct with respect to the negotiation, execution, and approval of a Securities Purchase Agreement that enabled Loral's controlling shareholder - MHR Fund Management LLC - the exclusive right to purchase from Loral shares of two newly created series of convertible preferred stock for $300 million.

What was the problem with the transaction? Well, according to the hedge fund, a lot:

1. The transaction appears on its face to be a sweetheart deal for MHR. The aptly timed transaction not only took place without any competitive bidding but also appears to have been "spring-loaded" in that shortly after the announcement of the SPA, Loral announced a series of positive business developments that caused its stock price to rise from $27 per share to $51 per share. And what was the conversion price of the SPA shares? They were set below the intrinsic value of Loral set by the bankruptcy courts only 18 months earlier at $30.15 per share.
2. The terms of the transaction were unfair and oppressive to Loral and its non-participating shareholders. The transaction provides for the issuance of shares to MHR representing approximately 50% of Loral's current equity, giving MHR the opportunity to increase its equity stake from 35.9% to 56%! Moreover, Loral had no need to accept an insider transaction carrying such unfair and onerous terms. The company had ample cash available, no identified need for the $300 million of capital, and no identified exigency that would force Loral to agree to such a deal.
3. The transaction entrenches current directors by giving MHR an enormous number of additional votes when their SPA's convert to common stock along with triggering punitive financial consequences due to a "change of control" in the board's composition under the terms of the transaction.
4. The board can no longer remain independent now that three of Loral's eight directors are affiliated with MHR, including the non-executive vice chairman of the board. Moreover, with the enormous voting power now granted, it is unlikely that the board would offer much opposition to MHR demands.
5. The transaction was with Loral's controlling shareholder, which was a fact that was disclosed publicly. Additionally, the company has said that MHR exercises significant influence over Loral's operating subsidiary, Loral Skynet.

While the outcome of this investigation obviously remains to be seen, there is certainly some shady aspects of this deal. This case only further demonstrates the occasionally negative influences that activist shareholders can have on companies - something that investors much watch carefully when evaluating investment opportunities.

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Lenox Group, Inc. (NYSE:LNX) shares moved up $0.16, or 3.16%, to $5.23 today after the Clinton Group expressing its concern over previous management and the board's performance in guiding the company. As the second largest shareholder, the hedge fund urged the company to consult shareholders with respect to any material changes at the company, including (1) modification of the company's engagement of Carl Marks Advisory Group, (2) offers of employment for senior management positions, (3) capital structure and financing issues, and (4) any strategic transactions potentially being contemplated by the company. The Clinton Group also offered to help facilitate the company's turnaround and exploration of strategic alternatives by providing three director candidates for shareholder consideration. The Schedule 13D/A filing showed The Clinton Group holding a 10.9% stake through two of its Cayman Island-based funds. This large stake would give them significant leverage in any conflicts or negotiations with the company in the future. Notably, John Morgan and his affiliates (7% holders in the company) expressed similar dissatisfaction with management back in September of last year. This makes LNX a stock worth watching!

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eSpeed, Inc. (NDAQ:ESPD) shares moved higher yesterday after Chapman Capital disclosed a 9.3% stake and demanded that the company put itself up for sale in a Schedule 13D filing with the SEC. Problems began in early 2004 when the hedge fund begun to recognize a significant divergence between the performance of the company's common stock and its publicly traded peers. Specifically, in 2004 the company stock plummeted 47% while that of its peers remained flat, and in 2005 the company's stock dropped 37% while its peers added 49%. Then in January of 2006 there was a glimmer of hope when The Daily Telegraph reported that Cantor Fitzgerald was preparing a stock market float of BGC Partners, its London-based brokerage business, in a move that was expected to lead to a merger with eSpeed, the Nasdaq-quoted broker also controlled by Cantor, to create a company worth between $500 million and $1 billion. However, this deal never materialized. Then, in a highly questionable December 2006 Form 4 filing with the SEC, Mr. Lutnick was granted, free of cost, 800,000 Class A common stock options - representing 3% of the company's outstanding shares! This upset many investors who feared the potential dilutive effects of the options. Finally, the last straw came in February of this year when the company issued a press release that disclosed its FY2007 financial outlook. Investors were outraged to find out that company projected nearly break-even operating performance due to approximately $152 million of non-GAAP operating revenues being consumed by $146 to $148 million of non-GAAP operating expenses, a level of spending which Chapman Capital and other investors have thought unacceptable.

So, Chapman finally voiced his opinions during the company's February 14, 2007 conference call to discuss 4Q2006 earnings. Mr. Chapman commented, "Why not actually take the initiative, retain an investment bank, and actually try to find someone who can deliver immediate value to the owners? And it doesn't have to be a cash transaction. It can be a stock swap. If the transaction is as accretive as you might fear it to be for the buyer, i.e., that you think you might be selling the Company too cheaply, in theory, and it typically has worked out this way in the past, the acquirer shares that we'll be receiving as eSpeed holders will appreciate and make up for any discount you think we may have gotten in the transaction. Because being open minded and understanding a couple of cents per quarter in cost for growth is one thing. But the other side of the page is the opportunity cost. Had you years ago, with the benefit of hindsight, obviously, been able to see what could happen with the stock, with ICAP and some of the other competitive initiatives that have hurt the Company, we could be sitting on a $15, $20, $30 value now in another currency instead of eSpeed. So I would encourage you to be more than open minded. I think being much more proactive in this will be to the benefit of the owners. We want to stay constructive as owners of this Company. But the ownership base, seeing us on the 13F filings has been calling us and asking us to get much more aggressive in pursuing the Company to sell itself, and I hope that you'll see the light before we feel the need to do so."

Chapman Capital began contacting the company's peers to (1) broaden the understanding of the company's business, assets, liabilities, and competitive positioning, and (2) inform the company's peers of their interest in selling the company. The hedge fund also began contacting various past and present owners of the company in order to survey their views of the company. They found that the ownership base conveyed a nearly uniform desire for the company's value to be maximized through a change-of-control transaction. The problem is that approximately 88% of the company's voting power is controlled by Mr. Lutnick and his affiliates, despite owning a minority of the company's common stock. This is accomplished through the issuing of Class B shares, which have a higher voting power (10 votes each). Consequently, Chapman Capital demanded that the board of directors convert all Class B shares to Class A common stock. In the end, the hedge fund said that given Mr. Lutnick's failure to perform in his capacity as CEO, the company's long-term shareholder value should be maximized via a full scale auction of the company that is not limited to BGC as the sole negotiating counterparty. If this takes places, shareholders could see significant upside from these levels. This makes ESPD a stock worth watching!

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Cisco Systems (NDAQ:CSCO) said it will buy online videoconferencing company WebEx Communications for $2.9 billion as part of a strategy to sell comprehensive packages of communication products. The deal, worth $3.2 billion including WebEx's existing cash, would be Cisco's biggest acquisition since the network equipment maker bought cable set-top box maker Scientific-Atlanta for $7 billion last year. Cisco said on Thursday it will launch a cash tender offer for all outstanding WebEx shares at $57 each, a premium of 23% over their Nasdaq close of $46.20 on Wednesday.

A General Electric (NYSE:GE) unit and private equity firm Blackstone Group will jointly acquire mortgage and vehicle fleet management company PHH for $1.8 billion in cash, the companies announced Thursday. The $31.50-per-share purchase price is about a 13% premium to PHH's closing stock price of $27.81 on Wednesday. PHH shares jumped in trading on the NYSE. GE is paying sixteen times expected 2007 earnings of $1.95 per share, according to Reuters Estimates, which is based on one analyst's estimate.

Ameriprise Financial (NYSE:AMP) said on it plans to buy back as much as $1 billion in stock and increased its quarterly dividend to $0.15 to $0.11 per share.

The 159-year-old Chicago Board of Trade (NYSE:CBOT) found itself the target of a possible bidding war Thursday when electronic futures market IntercontinentalExchange Inc. made a surprise $9.9 billion all-stock bid, threatening its deal to merge with the crosstown Merc.Shares of CBOT jumped $28.86, or 17.4%, to close at $194.95 on the NYSE. ICE fell $3.83, or 2.9%, to $128.10, while CME shed $31.09, or 5.5%, to $532.88.

Bear Stearns Cos. (NYSE:BSC), Wall Street's largest underwriter of mortgage securities, reported Q1 rose 8%, despite turmoil in the subprime lending sector. Its profit after paying preferred dividends rose to $548.5 million, or $3.82 per share, for the three months ended Feb. 28 from $508.7 million, or $3.54 per share, a year earlier. Revenue rose to $2.48 billion from $2.19 billion last year.

The Topps Company, Inc. (NDAQ:TOPP) may face some strong shareholder opposition after it ousted two hedge fund managers from a committee built to evaluate possible rival bids to the company's standing $385.4 million buyout agreement with Michael Eisner's Tornate Co. The committee - which included Arnaud Ajdler from Crescendo Partners and Timothy Brog from Pembridge Capital Management - was initially setup by the company to seek better offers during the next 40 days after Topps was sued by a shareholder on March 8th who sought a higher sale price. Ajder and Brog, who collectively own 6.6% of the company, contend that the $9.75 per share offer was too low and expressed concern that the company did not show the company to all possible buyers (notably, director John Jones also opposed the bid).

Ajder fired back at management today in a letter attached to his Schedule 13D/A filing with the SEC. In the letter, he said that the company set a new low in corporate governance that would be taught in business schools as a clear illustration of poor corporate governance. Ajdler went on to note five concerns:

1. The board appointed two new people (who support the existing merger agreement!) with the power to monitor the day-to-day developments during the "go-shop" period and made it clear that the Ad Hoc Committee (of which Brog and Ajder were members) no longer had such authority. Why? The board reasoned that the two hedge fund managers could not adequately reprensent the best interest of shareholders!
2. The board created an Executive Committee consisting of all board members except Brog and Ajder. Instead of allowing them to voice their opinions in the company's board room, the company simply created a new committee to silence opposing views. Clearly this isn't in the best interest of shareholders.
3. The company failed to correct a statement that it made on March 7th to the WSJ in which it said, "'Over the past two years, we have been working with Lehman Brothers to examine all opportunities to deliver value, and no other superior proposals emerged in that time frame,' said a spokeswoman to the company." This statement gives the false impression that Topps was shopped or that alternative proposals were solicited before entering into a merger agreement at $9.75, which isn't true.
4. The board held a telephonic meeting in which none of the three directors who voted against the merger agreement were provided with an agenda. When a motion to have Topps issue corrective disclosure was duly made and seconded at the meeting, it was ruled out of order by the chairman because he said it wasn't on the agenda.
5. The company mischaracterized Ajder's comments opposing the deal as stemming solely from the fact that the process that led to the merger agreement was flawed because the board did not shop the company; however, the main reason was the inadequate offer price.

In the end, Ajder strongly urged the comapny to reconstitute the Ad Hoc Committee, to disband the Executive Committee and to make corrective disclosure. Topps continues to ignore the will of its shareholders and continues to be run as a private club, and according to the hedge fund, this must stop. If the company takes such corrective actions and additional bids are solicited, it could mean significantly higher offers for the company. This makes TOPP a stock worth watching!

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Metro One Telecommunications (NDAQ:INFO) shares moved up $0.12, or 5.91%, to $2.15 after Strategic Turnaround Partners LP (STEP) disclosed a 9.17% stake and expressed their concern over the current management and direction of the company in a Schedule 13D filing with the SEC. The hedge fund said that it has been supportive of the company's management and efforts to lower operating cost structure and respond to the loss of significant contracts; however, they now believe that the company's board and management develop an efficient and effective plan to realize the company's growth potential over the next year. Moreover, STEP said they read the 13D filing by Everest Special Situation Fund LP and agreed with the demands made to the company's board to maximize shareholder value, including bringing in an executive experienced in coporate restructurings. Finally, they asked that the company install one of its own nominees to the board of directors to help the company implement these changes.

Everest Special Situations Fund, an 8.1% holder, obtained board representation in April 2006, and has since been lobbying the board from within to take immediate action to restructure the company's operations and lower the company's cost structure in response to the loss of the company's largest customers and heavy operating losses. However, despite their efforts, the company has failed to take the immediate and aggressive measures necessary to make the company profitable. The hedge fund said that the company's chairman of the board, William Rutherford, has been slow to make important decisions and has not provided the leadership that the company needs to counteract these losses. As a result, Everest made three demands in a Schedule 13D/A filing that STEP now supports:

1. Call for the resignation of the company's chairman of the board, William Rutherford.
2. Elect a representative of one of the company's largest stockholders as a chairman of the board.
3. Hire a chief restructuring officer or similar executive who specializes in corporate turnarounds.

Finally, Everest said that it may seek to replace members of the company's board through a proxy contest at the next shareholders meeting if necessary. This is all good news for shareholders who have dealt with significant losses now for several years. The company's stock has dropped more than 98% since its highs in mid-2001, and the only way it is going to turn itself around is with a good turnaround team and confident leadership. Combined, these factors make INFO a stock worth watching!

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General Motors Corp. (NYSE:GM) fell 0.9%, even after the company returned to profitability in the fourth quarter, when it said that it is refunding $1 billion to its financing unit GMAC after selling 51% of the lending unit due to losses at its residential mortgage business.

Citigroup (NYSE:C) rose 0.7% after one of its executives said the bank won't lift its offer for Nikko Cordial any further. This is good news for investors after the company had already hiked its bid by 26% to $13.4 billion on Tuesday.

Google (NDAQ:GOOG) fell briefly today after Viacom (NYSE:VIA) filed a $1 billion lawsuit alleging that its YouTube unit used more than 160,000 of its videos without permission. Despite its prior successes, Viacom will likely face strong opposition by the well capitalized darling of Wall Street.

Accredited Home Lenders (NYSE:LEND) shares dropped over 65% after it said it is seeking more capital and exploring strategic options after paying about $190 million in margin calls since January 1st. This is the latest subprime lender that has been experiencing issues with the drastic increases in defaults.

New Century Financial (NYSE:NEW) shares were suspended today after the NYSE officially delisted their stock after shares fell by more than 50%. The company said that its obligations to Credit Suisse First Boston Mortgage Capital were $1.4 billion, up from the prior estimate of $900 million.

Boeing Co. (NYSE:BA) shares rose 1.9% after Continental Airlines increased a previous order of 20 Boeing 787 jets to 25.

Schering-Plough Corp. (NYSE:SGP) agreed to purchase Organon biosciences for $14.4 billion in cash from Holland's Akzo Nobel, which previously planned to sell part of the unit through an IPO.

Dollar General Corp. (NYSE:DG) jumped 25% after it agreed to be acquired by affiliates of buyout firm KKR in a transaction worth $7.3 billion.

Infospace Inc. (NDAQ:INSP) may face some shareholder criticism in the near future after Sandell Asset Mangement disclosed an 8.8% stake and expressed their concerns over the company's lack of definitive plans to return capital to shareholders and its apparent complacency on cost controls. Tom Sandell, the CEO and Senior Portfolio Manager of Sandell summarized the hedge funds stance best, stating, "We believe that InfoSpace shares are materially undervalued and the board and management should take immediate steps to improve that value. If the company and the board are unable or unwilling to take these steps, we think the company should be sold. As the company's largest shareholder, our interests are directly aligned with the rest of the shareholder base in seeing value maximized and we may seek representation on the board to protect those interests." Specifically, the hedge fund seems most concerned that the company's actions have obscured the profitability and cash flow strength from the company's search/directories segment and impaired the value of the company's largest asset - a NOL (net operating loss) carry-forward topping $1 billion.

Sandell insists that the company is undervalued due to several factors:

1. Cash - The market is not giving full value to the company's $12/share in cash due to fears that management may waste the cash on a dilutive acquisition to replace the growth engine lost at the mobile business. Sandell noted that they were encouraged, however, by the company's statements that the company intends to do no such thing.
2. Net Operating Loss Carry-Forwards (NOLs) - These are assets that are frequently missed by investors in many companies - they are losses from past years that can be carried over to offset income taxes in future tax periods. The share price of INSP reflects virtually no value to the more than $1 billion in NOLs. Sandell attributed this to the fact that many investors are uncertain as to whether the company will be run for profitability or growth. With its current revenue and asset mix, management's lowest risk strategy would be to focus on maximizing profitability and selectively adding profitable cash flowing businesses that compliment the search/directories business. However, without an unrelenting focus on costs, this asset will be almost worthless.
3. Online - Sandell said that it believes that the true value of the online segment is being clouded by the confusing segment reporting and excessive corporate costs, which mask the true earnings power of this business. Moreover, concerns over growth prospects after last quarter's revenue declines likely added to this fact. The hedge fund insists that with better segment disclosure and a return to positive top line growth should result in at least a 40% EBITDA margin if it were run at optimal efficiency.
4. Mobile - Sandell insists that the stock price implies that investors are assigning zero value to this business even though there is still a stable core business outside of the affected content/ringtone business. Further, they believe that this segment should be a very attractive acquisition candidate due to its strategic positioning with the major mobile carriers and believe that InfoSpace should investigate the possibility of divesting this business.
   

So, what exactly does the hedge fund suggest? Well, they outlined two key elements in their letter to the company's Board of Directors:

1. Reduce expenses by at least $15 million through the end of 2007, which should add up to $5 of incremental value to the stock. While the company is currently working on cost cutting in its mobile division, the hedge fund said it would like to see this applied to the entire enterprise. Specifically, many of the expenses present in these areas are likely legacy expenses inherited from a time when INSP was a much larger company.
   
2. Buy back $200 million of its common stock through a Dutch tender offer at a premium to the current market price along with a $100 million special dividend. Sandell believes that these actions would not have any negative impact on the company's ability to utilize their NOLs going forward. Moreover, they believe that the two actions would send a very positive signal to the market that the company feels the problems of the past year are behind it and that management and the board are focused on enhancing shareholder value.

Clearly, Sandell makes a compelling argument for taking action to unlock shareholder value. They estimate that the company could be worth around $35 per share in the event of a simply restructuring and up to $41 per share in the event of a breakup. Sandell also stated that if the company did not heed these changes, they should hire an investment banker to pursue other strategic alternatives, which could include a possible sale of the company's various divisions. Combined, these factors definitely make INSP a stock worth watching closely!

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Ceridian Corporation (NYSE:CEN) shares moved down $1.01, or 3.07%, to $31.86 after the company's Chief Financial Officer, Douglas Neve, resigned and Gregory Macfarlane was appointed to take his spot. Further compounding this loss was Pershing Square's press release in which they expressed concerns about the company's new CFO and the board's failure to retain key management personnel. The news comes amidst a proxy contest currently taking place between the company and Pershing Square and a recent lawsuit filed by the hedge fund seeking the release of certain letters related to communications between the company's board and management.

What problems did Pershing Square find with this CFO replacement? Well, the hedge fund first highlighted Mr. Neve's career in which he has been widely credited with re-staffing and rebuilding the company's finance and accounting organization, restoring investor confidence in the company's financial statements (after an SEC investigation and five restatements!), and driving Ceridian's HRS division margin improvement program. Clearly, he is a man that will be missed by analysts and investors. Then Pershing questioned the appointment of a division-level finance executive as CFO - someone who lacks experience with public companies. They questioned how the company concluded that this was the right hire at the right time. Moreover, they question why the board remains not only unconcerned about the departure of several high-profile executives but also the recent influx of former GE employees who have little experience in the markets in which Ceridian operates.

Clearly, there is reason for concern when several important executives leave the company. Pershing concluded their statement by saying that the board of directors should act with appropriate care regarding long-term employment commitments they extend throughout the company's senior ranks. If the hedge fund is successful in their proxy contest, we can be sure that greater care will be taken to retain key personnel necessary to orchestrate a turnaround and spin-off. Whether or not they are successful in their proxy contest remains to be seen, but for now, this is definitely a great stock to watch!

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The Pogo Producing Company (NYSE:PPP) said today that it agreed to add two members to its Board of Directors from Third Point LLC, effective immediately, expanding the Board's size to ten members from eight. In return, the activist hedge fund agreed not to solicit proxies in Pogo's 2007 annual meeting or take certain other hostile shareholder actions. The news comes after many investors, including Third Point and Third Avenue Management, had expressed concerns about the company's valuation and management's inability to unlock value. The hedge fund had encouraged the company to sell the company in whole or part in the past, threatening a proxy fight if the company didn't heed its demands.

So, what does all of this mean? Well, according to the company's press release, Pogo and its financial advisors, Goldman, Sachs & Co. and TD Securities Inc., are actively exploring strategic alternatives, including the sale or merger of Pogo. In addition, the company said it will continue to simultaneously pursue the potential sale of significant assets including its Canadian, Gulf of Mexico or other properties. Knowing Daniel Loeb's past successes, we can be sure that something will be done to unlock value. These factors make PPP a stock worth watching even more closely during the next couple of months!

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