ESS Technology (NDAQ:ESST) shares rose over 8% this week after Riley Investment Management disclosed a 1.3m share stake in the company and expressed their concerns over the company's management and valuation. The company operates in the semiconductor industry and services the consumer electronics and digital media marketplace. These have been the subject of many recent takeover attempts and could be an industry for further consolidation.

Riley believes that the shares are undervalued and that the current restructuring should be expedited with the ultimate conclusion being a liquidation of the company. Ultimately, the activist hedge fund believes that a liquidation of the company could result in a 100% appreciation of ESST shares; however, that value deteriorates every day the company functions in its current structure. The fund is also concerned that the company may make an acquisition that will further deteriorate the remaining equity value. Consequently, Riley will issue one more letter to the company's board describing their position in greater detail while threatening to replace members of the board if no action is taken. Combined, this is great news for shareholders as it could mean a significant increase in value over the short term. This makes ESST a stock worth watching!

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Interactive Brokers Group (NYSE:IBKR) shares plummeted $1.98, or 7.19%, to $25.57 in early trading today after the company released lower first quarter earnings on higher revenues. The newly IPO'd options firm posted net income of 31 cents per share compared to 34 cents per share one year ago.

Why is this so troubling for investors? Well, the brokerage market appears to be extremely hot right now with almost all competitors posting record gains while IBKR was the first to be stalling. The brokerage clearly experienced some of this upside in the market by increasing their trading volume by 40% quarter over quarter but somehow managed to report declining earnings.

Interactive Brokers reported declining revenues from trading gains and other income while interest income and revenues from commissions and fees rose. These numbers suggest that the brokerage raised its fees in order to compensate for lack of bottom-line net income growth - a negative sign to many investors. Whether this is a one-time occurrence or a larger slowdown in the brokerage industry remains to be seen; however, this stock is definitely one to watch.

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Avaya (NYSE:AV) share jumped $1.94, or 14.19%, to $15.61 after reports surfaced that the company is in buyout talks with private equity firm Silver Lake Partners. The Wall Street Journal report also said that Nortel could step up as a bidder, citing people familiar with the situation.

These days private equity buyout rumors tend to dominate the market headlines and separating fact from rumor is imperative to success. So, what facts support an Avaya buyout? Well, the company was already in buyout talks with Nortel just last month, but the deal fell through after the two parties could not agree on the cash/equity deal structure. The company also has strong cash flows and relatively little debt, making it an ideal acquisition in the fast-growing VOIP market. And finally, Avaya also postponed its May 31st analyst conference, which many see as an indication that the company may very well be in buyout talks.

Combined, these series of events along with a WSJ report citing an exact hedge fund as suitor gives some credibility to this rumor. Given the interest by Nortel, this potential acquisition by a financial buyer could be an attempt to take over the company simply to resell it at a higher multiple to larger strategic buyers in the near future. This is likely why Nortel or other strategic buyers could place their own bids to attempt to get the company for cheaper. Regardless, this is definitely a stock to keep an eye on as the situation unfolds!

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Building Materials Holding Company (NYSE:BLG) shares moved up $1.92, or 13.38%, to $16.27 today after Chapman Capital disclosed a 7.4% stake and expressed their concerns over the company's performance. Specificially, the activist hedge fund suggested that the stock's value could best be unlocked through a sale of part or all of the company.

Chapman first noted that while management cannot be blamed for the steep correction in the U.S. homebuilding market, the board's generous reward distribution to management during this downturn should not be overlooked. Equally troubling is the fact that management and the board have very little stake in the company while much of what they do own was granted to them free of charge. This lack of a stake in the future of the company is certainly a cause for concern.

Chapman then argued that the company is undervalued. To unlock this value the hedge fund recommended that the company immediately hire financial advisors to explore selling all or part of the company. After all, the building materials sector is clearly amid a consolidation wave. Chapman has also recently made personal contact with BLG’s peers and leveraged consolidators of the building supply industry, and they can convey an extremely high level of interest from both private equity and strategic building supply players in the acquisition of the company.

Chapman Capital recognizes the unique value of BMHC’s assets, the years and efforts required to assemble and integrate them. As a result, they are not encouraging an inopportune, undervalued sale, but instead a methodical auction timed to consummate into the inevitable cyclical recovery. And this would be great news for the company's shareholders who have suffered since the downturn in 2006!

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Circuit City (NYSE:CC) shares jumped $0.16, or 1.03%, to $15.69 today after an Associated Press story suggested that the company may need a buyout or major management shakeup to recover from recent profit warnings and increasingly intense competition.

Circuit City rejected a $17 per share buyout offer in 2005, instead opting for a turnaround effort that was quenched by a price war on flat screen televisions last year. The price war caused the company to replace 3,400 workers with cheaper labor that ended up hurting sales. Overall, the situation for Circuit City isn't looking all to good with one of its competitors even considering bankruptcy.

So, what are the chances of a buyout? Well, the fact that the company has received a bid in the past for an amount greater than the current market price suggests that it is could be a possibility. Moreover, while some other companies may be cheaper, nobody can match Circuit City's status as the second largest electronics retailer in the United States. Combined with the financial troubles that the company is in, it would not be too hard to fathom a buyout scenario. This makes CC a stock worth watching!

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Wendy's International (NYSE:WEN) shares continued their rise today after its new ad campaign debuted on American Idol earlier this week. The fast food company has been struggling to regain its advertising foothold ever since Dave Thomas passed away in 2002. Now the company is back with a fresh new campaign centered around their new slogan: That's right. Wendy's shares rose the day after the campaign as many investors hoped that it would help boost the ailing chain.

Wendy's also announced last week that the special committee of the board that had been exploring strategic options had retained J.P. Morgan as lead advisor and Lehman Brothers as co-advisor. These moves suggest that the company is beginning to seriously explore some potential extraordinary transactions such as a sale of the company, recapitalization or special dividend. It is also worth noting that activist investors Bill Ackman and Nelson Peltz have been involved in pushing the company towards unlocking value for its shareholders.

Many rumors have surfaced regarding potential bids for the company in the past; however, nothing has been confirmed. Investors do know, however, that the company is actively exploring ways to unlock value while working to increase its brand awareness through a unique new advertising campaign. The results on both of these fronts remains to be seen, but WEN is definitely a stock to watch in the meantime!

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Ditech Networks (NDAQ:DITC) shares dropped $0.24, or 2.87%, to $8.13 after the company announced lower fourth quarter earnings and narrowed its guidance. The telecom equipment provider also received a letter from 5.8% owner Riley Investment Management who suggested ways to cut costs and improve revenues while returning the company's excess cash to shareholders.

The activist hedge fund expressed its concern and outlined a plan to enhance shareholder value in a Schedule 13D filing with the SEC. Since Ditech's public offering, the company has accumulated losses of over $80 million while spending $110 million in stock and cash on acquisitions and $188 million on R&D. Meanwhile, the current enterprise value stands at a mere $114 million (including NOLs), which suggests that many investors don't have much confidence in the company's future.

Despite this bleak past, Riley believes that the company is well positioned for strong cash flows and operating profits as its customer base continues to diversify and expand. The hedge fund's analysis shows that the company could be at an EBITDA run rate of $25 million in the next couple of quarters and as high as $35 million in the near future with continued customer wins. Notably, the company also has $135 million in cash on its balance sheet!

Riley suggested that given their analysis, the company should consider implementing a series of initiatives to improve its fundamentals and return at least $100 million to shareholders through a dutch tender offer between $9 and $11 and a special dividend to return the balance. Moreover, if the hedge fund's projections were overly optimistic in the company's eyes, it should consider simply issuing a cash dividend amounting to $100 million - or $3 per share.

Riley insists that Ditech is at a critical juncture. Shareholders entrusted the company with over $75 million in cash during its IPO at $11 per share and a secondary at $50.75 per share. Since then, the company's stock has declined 84% in eight years as VCs unloaded and insiders kept their exposure limited. Now, the company's fundamentals seem to be improving while a new CEO is stepping in that better understands the company's obligations to shareholders.

Riley also noted that they may seek board representation and have done so in the past with great success. Combined, these factors make DITC a stock worth watching closely over the next few months!

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Packeteer Inc. (NDAQ:PKTR) shares moved up $0.26, or 2.73%, to $9.77 today after Elliott Associates disclosed a 6.3% stake in the company and communicated their belief that the board of directors should be directing their attention to a prompt sale of the company.

The activist hedge fund reasoned that the company had failed to adequately perform and therefore should be sold in order to unlock value for shareholders. In particular, Elliott Associates noted that the company possesses a leading technology in one of the fastest growing segments of the networking market but has been unable to capitalize on this advantage.

The hedge fund also noted that the market segment in which the company operates is becoming increasingly competitive and therefore it may be prudent to sell while valuations are still high. Moreover, there are probably many parties that would be interested in bolstering their products and services with the market leading technologies possessed by Packeteer.

Combined these factors would make PKTR an attractive target for potential suitors if the company was shopped by the board of directors. And obviously, any buyout would come at a substantial premium to the current market price making this stock one worth following!

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Dell Computers (NDAQ:DELL) shares moved up after the company announced that it would begin selling two two Dimension desktop models in 3,000 WalMart stores in the U.S., Canada and Puerto Rico beginning on June 10th.

The news marks the end of Dell's signature direct-sales policy that marked its success for the past decade. Michael Dell, the company's founder and CEO, noted that direct model has been a revolution, not a religion. The move towards retailing some of its computers is only the "first step" in a larger strategy to help the ailing computer maker to turn itself around.

The change also marks one of the more dramatic changes by founder Michael Dell after he took the reins from former CEO Kevin Rollins who oversaw declining sales and margins. Many analysts and investors are hoping that this move will help the company improve its sales and bolster its earnings. Whether or not this strategy will succeed remains to be seen; however, such a dramatic move definitely makes DELL a stock worth watching!

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Toll Brothers (NYSE:TOL) reported devastating results for their fiscal second quarter amid a housing market that continues to struggle. The home builder's earnings fell from $174.9 million to $36.9 million while its revenues sank 23% to $1.17 billion. Toll also suffers from a high cancellation rate of 19%, a 40% decline in contracts, increasing unsold inventory and a backlog that decreased by 32%. These numbers paint the picture of a housing market that continues to struggle to gain foothold and engineer a turnaround.

Toll Brothers also announced that it was so uncertain about future revenues that it will not make an earnings forecast for the rest of the year. CEO Robert Toll only said that, "We continue to operate conservatively in the current difficult market. In what generally remains a soft market, there are glimmers of strength in certain territories."

Some analysts and investors were hoping that last week's rise in the mortgage applications index would provide a boost to the company's earnings. Most analysts polled pegged the company's earnings this quarter at $0.25. However, the company's earnings ended up at $0.22 as many now believe that the rise in mortgage applications is simply the result of more strict regulations - that is, more people were being rejected and reapplying.

These results are also bad news for other homebuilding and related stocks including Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Analysts were expecting these companies to turn around in the second quarter; however, the results posted by Toll Brothers suggests that the market has a long way to go before any meaningful recovery. Regardless, this is definitely a sector to watch as we wait for the housing market to report a turnaround in demand.

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