ITC Deltacom Inc. (OTC:ITCD) has performed extremely well during the past year after shedding many of its unprofitable businesses while expanding the profitable ones. The telecommunication company's stock is up from a 52-week low of $0.70 to a high of $7.09. ITC hit a nerve with investors last week, however, when it proposed a recapitalization that would provide a massive payday for management while short-changing small non-controlling shareholders.

H Partners Capital disclosed a 6.4% stake in the company and detailed their concerns over the recapitalization in a letter to the company's board of directors. According to the company's 8-K filing with the SEC, the purpose of the recapitalization was to make the balance sheet more transparent by eliminating the confusing overhang of convertible preferred shares and warrants. H Partners insists, however, that this is completely unwarranted and the resulting dilution would hurt common stock shareholders.

So, why would the company do it? Well, the recapitalization would enable the company's controlling shareholder and other interested parties to convert their preferred shares and warrants to common stock at a more than 50% discount! According to H Partners, "The recapitalization is nothing more than the controlling shareholder and those acting in concert with it, reapprotioning equity to itself at the expense of non-controlling shareholders to the detriment of the company."

In the end, ITCD serves as a great example of how powerful shareholders and the board of directors can work in conjunction to enrich themselves at the cost of non-controlling shareholders. Rights offerings, recapitalizations and other financing techniques are often filed deep within SEC documents in ambiguous terms - rarely are we so lucky to have an investment firm outline the problems in plain English in a public complaint. This is something all investors in speculative companies should watch for on a regular basis as it could have severe negative implications for the companies involved.

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Bristol-Myers Squibb (NYSE:BMY) set a new 52-week high this week after a federal judge upheld a patent on Plavix - the company's best selling drug with over $938 million in first quarter sales. Many traders positioned themselves for further upside with more than 244,000 call options (mostly out of the money) trading hands yesterday on a base stock move of over four percent. The move indicates the increasing number of BMY bulls in the short term.

The drug company was also lifted by speculation that it could become the subject of a takeover by larger drug companies like Sanofi-Aventis. Now that the legal issues surrounding Bristol-Myers' #1 selling drug is cleared up, many investors believe the likelihood of such a deal has increased. Analysts peg the value of any deal in the mid to high 30s per share; however, wide-reaching partnerships with many companies in the industry may cause complications.

So, is this a stock worth buying? Well, clearly many investors and analysts are very bullish on the company while a giant legal cloud over its best drug has been lifted. Moreover, there is speculation that the company could receive buyout bids in the future. The company also has strong earnings and cash flows that have led to a strong bull trend in the stock price for more than a year. Combined, these factors have led to many trend followers along with opportunistic investors to jump onboard. Whether or not there is significant upside from here remains to be seen; however, we know that the options activity and past trends are all pointing up!

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ESS Technology (NDAQ:ESST) announced yesterday that it hired Neeham & Co. to help it evaluate strategic alternatives, which could include a total liquidation of the company. The move follows demands made by investment firm B. Riley & Co. that the company sell off its remaining businesses, sell its investment and real estate assets and return the proceeds to shareholders.

ESS Technology has struggled amid rising competition from chip designers in Taiwan and China along with increased pressure from larger rivals who have the ability to package technology similar to ESS' with complementary components. The semiconductor company has experienced eleven straight quarters of losses and is expected to lose money for the rest of 2007. This poor operating history combined with the company's small size caused concern among investors.

Last year, the company addressed these issuing in a broad restructuring effort aimed at curbing its operating expenses. These efforts resulted in the sale of its high-definition Blu-Ray DVD chip business and the closing of its camera phone business along with a 67% cut in their workforce. In the end, they were able to half their operating expenses and improve their bottom line; however, there is still a lot of concern as to the viability of any turnaround effort.

ESS Technology is currently undervalued on an asset basis; however, increased spending with no profitability in sight has kept most investors rather skeptical. Consequently, the new effort to explore strategic alternatives may be the only way the company can unlock significant value in the near-term. This makes ESST one worth watching!

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PHH Corporation (NYSE:PHH) may face increased criticism from shareholders concerned over its decision to pursue a sale of the company despite a poor valuation. Pennant Capital Management disclosed a 7.8% stake in the company and issued a letter to the board outlining their belief that the company's shares could be worth as much as $51/share - significantly higher than the current buyout premium of $31.50/share.

The outsource provider of mortgage and fleet management services issued their proxy statement on June 18th that paint a picture of a seller in panic mode as bidders were dropping out and even Blackstone blinked at the eleventh hour. Interestingly, the issues that caused the panic were all irrelevant or self-inflicted and temporary; the two main concerns were of the sub-prime meltdown and the inability to file financial statements on time. These factors led to a proposed buyout of just $31.50/share.

Pennant believes that the real value of the company can be pegged closer to $51/share within two years. The New Jersey based hedge fund proposed that the company separate its mortgage and fleet management segments via a tax-free spin-off, which could alone bring the stock price close to $36/share. Using deferred tax liability related to mortgage servicing rights, the company could also prevent around $10/share in tax leakage that they would experience in the event of a sale of the company.

PHH also reported better than expected results for full year 2006 and the first quarter of 2007. Using a 15x to 17x multiple of free cash flows, Pennant estimated that the fleet segment alone is worth between $17 to $20 per share. Incredibly, this valuation implies a sale of the mortgage segment at approximately 0.7x tangible book value! Meanwhile, the hedge fund values the company's mortgage business at $26 to $34 per share, which is an 8x to 10x multiple of the combined servicing and production after-tax earnings. Combining these two numbers, Pennant believes the company is worth $51 to $68 per share and could realize that value over the next two to three years.

In the end, Pennant believes that the proposed sale of the company is being conducted at a price far below the true value of PHH. Additionally, the company's preliminary proxy statement fails to address many critical issues including the benefits of rejecting the proposed sale of the company. Consequently, the hedge fund demanded that the company immediately amend its preliminary proxy statement to reflect these sentiments and give shareholders a fair view of the transaction. Combined, these factors make PHH a stock worth watching!

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Expedia (NDAQ:EXPE) shares rose $3.65, or 14.31%, to $29.15 today after the company announced that it will repurchase about 42% of its own shares. The company will conduct the $3.5 billion offer via a modified Dutch tender auction later this month. Shareholders will be eligible to tender their shares at that time for between $27.50 and $30.00 a piece.

Expedia still has a wrecked balance sheet, but with 42% less shares available it will improve modestly. The trick is being able to successful tender the shares; after all, the stock rose to nearly $30 per share in today's trading. Few shareholders are likely to want to tender their shares for the lower end of the range, making it hard for the company to go through with all $3.5 billion in buyout cash. In fact, the same problem faced Brinker last year.

So, what does this all mean for shareholders? Well, trading at the upper end of the Dutch tender price range with a PE of more than 25x forward earnings in a difficult industry certainly should be reason enough to think twice about picking up shares of Expedia. While their intentions may have been goodhearted, we have yet to see how the execution will play out.

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Nabi Biopharmaceuticals (NDAQ:NABI) may be in for a fight after nearly 40% of its ownership base filed Schedule 13Ds with virtually identical activist platforms - the conversion of the company into a royalty trust following a special dividend financed by divisional asset sales. Chapman Capital noted today that while the company has outlined plans to this end, they have yet to actually execute their plans and unlock shareholder value.

Just how much would this deal be worth for shareholders? Well, Chapman Capital estimated in their letter to the board that the divisional asset sale of Nabi Biologics alone should be able to return around $5/share - conveniently, around the price they averaged in at. The subsequent focus on developing the company's new drugs should provide a welcome boost for its shareholders. And finally, the change in structure to a royalty trust will greatly improve its financial ratios and subsequently their valuation.

In the end, activist hedge funds are circling this stock for a reason - there is substantial value that can be unlocked through a combination of divisional asset sales and a change in the company's overall structure. Many shareholders are banking on the stock at least doubling in the long-term following these efforts while simultaneously cashing out a hefty dividend from asset sales. Shareholders also have the comfort of knowing that they are supported by Chapman Capital, who has essentially threatened a proxy fight if the company doesn't follow through. All in all, this is definitely a stock worth watching!

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It's not too often that shareholders argue against the likes of George Soros, but in this case Bioenvision (NDAQ:BIVN) investor Steven Rouhandeh believes the billionaire is way off the mark. The company continues to support (along with Soros' funds) a buyout offer from Genzyme valued at $345 million - or $5.60 per share - and it has many investors quite upset.

Rouhandeh maintains that the current offer of $5.60 per share is very inadequate, representing a value of less than one-times forward revenues. The activist shareholder also argued that the timing of the deal is highly unfavorable as it comes in advance of an anticipated approval of clofarabine in the adult AML indication.

Rather than selling the company now at such a low premium, Rouhandeh suggested five steps aimed at creating far more value for a potential sale at a much higher multiple in the twelve to eighteen months range. These steps include:

1. Let the tender offer terminate: The market clearly believes the current offer is inadequate with more than 30 million shares trading above the buyout price. The buyout price also comes at an insignificant premium of only 7% and is not comparable to other industry acquisition multiples.
2. Reduce the influence of Soros at the board level: George Soros and his affiliates have managed to control 67% of the company's voting power while only owning 12% of the company's shares. New independent board members could help reduce this unhealthy balance.
3. Augment management with the recent proceeds from financing: Add additional personnel and others to augment management and enhance the odds of success, particularly with its upcoming new drugs.
4. Strengthen business development efforts: Expand business development efforts through in-licensing or through the acquisition of complementary products and technologies. Also, expand partnering and out-licensing agreements to enhance global presence.
5. Enforce Bioenvision's rights: Genzyme appears to be monopolizing the agreement between the two parties when in fact it is Bioenvision that is licensing rights to Genzyme. Force Genzyme to share its data with Bioenvision to help enhance the drugs.

Clearly, the current offer on the table is not one that most investors are happy with; however, management and the company's largest shareholder seem to remain in favor of the deal. Unless Rouhandeh can convince enough shareholders otherwise, the deal could go through. However in the event that the deal falls through, this is definitely a stock to keep an eye on over the next year.

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The Finish Line (NDAQ:FINL) announced an agreement to acquire Genesco (NYSE:GCO) for $54.50 per share in cash. Some investors are questioning the $1.5 billion acquisition, especially given the fact that Finish Line itself is only worth $600 million. The move will diversify the company's pure athletic product lines into such areas as casual dress and even footwear.

Finish Line said it expects to finance the transaction through $11 million in cash on hand and up to $1.6 billion in financing provided by UBS consisting of a revolving credit facility, a senior secured term loan and a senior bridge facility. Some investors believe this may be overburdening; however, the company is quick to note that it expects Genesco to be accreditive to earnings within the full year, before considering the incremental ammortization of the transaction.

So, what does this ultimately mean for Finish Line? Well, the company is clearly going to grow to a much larger size, but with larger size comes larger problems. The $1.6 billion in possible loans presents one of the most substantial problems and the company may consider selling or spinning off some of its new parts in order to lower its exposure. Regardless, this is a bold move that is definitely worth following as if properly executed, it could mean great returns for patient shareholders.

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North Pittsburg Systems (NDAQ:NPSI) shares moved up $0.68, or 3.49%, to $20.14 late Friday after Bulldog Investors disclosed a 7% stake in the company and again urged the company to put itself up for sale. The activist hedge fund argued that given CT Communication's recent buyout price, the company could fetch between $28.50 and $31 per share in the event of a sale.

Bulldog Investors noted their increasing concern regarding the accelerating consolidation in the RLEC industry that the lack of participation by North Pittsburg Systems. They insist that continuing to delay an inevitable sale of the company puts shareholders at risk of permanent capital loss. And with the recent weakness in NPSI's stock, the hedge fund believes that there would be many shareholders interested in a sale of the company for a 46 to 59 percent premium.

So, what does this mean for shareholders? Well, as Bulldog noted, the company's share price has been stagnant while companies around it have been acquired at substantial premiums. This means that many shareholders are likely willing to sell the company at the right price. Moreover, the activist hedge fund noted that while they would like to avoid a costly proxy contest, they cannot sit idly by while NPSI's value deteriorates. Combined, these factors make NPSI a stock worth watching closely over the next few months!

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Vitesse Semiconductor (OTC:VTSS) is facing some shareholder pressure recently after Chapman Capital disclosed a 5.3% stake in the company and demanded that it immediately hold an annual meeting to elect directors to the its board. The activist hedge fund also demanded that Jim Cole, head of the company's chief governance committee, immediately resign amid a series of scandals.

Vitesse has faced some extreme difficulties after being delisted from the Nasdaq Stock Exchange last year. These included an options backdating scandal along with a failure to produce more than two years of audited financial results. In fact, the last time shareholders were even permitted to vote on a slate of directors was nearly 17 months ago on January 24, 2006! Chapman Capital contends that one man stands behind the paper trail that led to this diseaster: Jim Cole.

Robert L. Chapman, Jr. commented, "Having conducted its own investigation of the Compensation Committee that seems to have approved the issuance of backdated stock options to former senior executives of Vitesse, Chapman Capital has followed a trail of circumstantial evidence and now finds itself on the doorstep of 20-year Vitesse director and Compensation/Audit Committees member Jim Cole.  Clearly, we are not alone in forming our opinion, with the majority of callers who spoke on Vitesse’s fourth fiscal quarter conference call referencing Mr. Cole’s prospective resignation from the Board.  Moreover, should the Vitesse Special Committee headed by former Teradyne senior executive Edward Rogas, Jr. have accumulated evidence that exposes Mr. Cole as having committed or been illicitly complicit in any criminal act, Chapman Capital demands that such information be turned over to federal authorities so that Mr. Cole may serve any prison sentence that may be dictated by the laws regulating such professional deportment."

So, where can Vitesse go from here? Well, if Jim Cole is forced to resign, many investors are hoping that the company can put its lackluster history behind it and move forward. The involvement of an activist hedge fund like Chapman Capital also helps the situation by serving as a catalyst for fast change. Once the company is able to rid itself of Mr. Cole and release updated financial statements, it may be able to refile for listing on the Nasdaq. From there, it can begin to rebuild what it once had. It is also worth noting that Chapman Capital had pushed the company towards a sale awhile ago - a strategy that it could resume after these problems have been resolved given the deep value at which the stock is trading. Regardless, this is definitely a stock worth watching over the next couple of months!

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