Steven Madden Inc. (NDAQ:SHOO) caught the attention of at least one activist investor today after the company announced that it was setting up a strategic review committee and hinted that a sale to a strategic or financial buyer may be in the best interest of the company. The Clinton Group disclosed an increased stake and reiterated that a leveraged stock repurchase would help improve the efficiency of the company's capital structure and create immediate value for shareholders while it explored the possibilities of a sale.

"We would support a sale of the company if the acquisition price reflected Steve Madden’s promising, long-term business prospects," wrote the Clinton Group in a letter to the board. "We think there are potentially multiple buyers who would be interested in the company. Steve Madden may be a logical target for a strategic buyer interested in diversifying its footwear portfolio, or a financial buyer who could steward growth in a flexible, private context."

The Clinton Group was also quick to note that they look forward to working constructively with the board and strategic review committee in order to facilitate this process. The activist hedge fund did not want to make this appear as if it were a hostile campaign at all. Clearly, this is also good news for other shareholders who stand to gain if the company announces a transaction. This makes SHOO a stock worth watching!

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Merrill Lynch & Co. (NYSE:MER) may face heavy fines and prosecution from regulatory authorities after reports surfaced that the firm may have been hiding its losses from investors through a series of transactions resembling the network of lies at Enron. Sources say that Merrill may have hidden its exposure to risky mortgage-backed securities by selling commercial papers through related entities that it agreed to repurchase in a year at a premium.

One of the deals being discussed was a $1 billion commerical paper sale by a Merrill-related entity containing mortgages. The hedge fund who purchased the papers had the right to sell back the paper to Merrill after one year for a guaranteed minimum return. Since the liabilities were never transferred, this transaction should have been reported to shareholders who could then account for them on Merrill's books. But instead, they were hidden for a year.

The issues never came to light until now after Merrill was forced to take a $7.9 billion write-down fueled by mortgage-related issues. Some are projecting that next quarter the firm will be forced to write-down $4 billion more in the fourth quarter after a combined $8.4 billion loss this quarter. Merrill still appears to be making its rounds with hedge funds, however, in an effort to reduce their exposure. But presumably, they will be a little more careful now as regulators begin to take a look into their activities.

In the end, Merrill is in a world of hurt that could get worse if regulators find that the firm took illegal actions to hide its risky mortgage exposure from shareholders and investors. The firm is not likely to close as a result of these allegations, but shares could see even more downside pressure. Combined, these factors make MER a stock worth watching!

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Sprint Nextel (NYSE:S) is reportedly considering a spin-off of its WiMax business amid declining profits and subscribers in its core business. There is speculation that Sprint may be looking to acquire WiMax-partner Clearwire (NDAQ:CLWR) and spin-off the two companies to satisfy investors who are skeptical of WiMax and looking for a separation.

Many technologists love WiMax but the project continues to be seen as a massive cash bonfire on Wall Street. Sprint previously announced that it is committed to spend nearly $5 billion over the next three years to complete the wireless network that is expected to have the same coverage area as standard cell phones. Clearwire is also expected to contribute roughly the same amount to finish its national footprint.

However, there are those that are betting on WiMax becoming the new global standard for wireless. Clearwire has an impressive list of large investors, including Intel and Motorola, who have a great deal to lose if the project gets slowed down. A combination of Sprint and Clearwire would not only result in substantial capital savings from synergies but also likely enable financial support from the companies that have a stake in WiMax's success.

In the end, the WiMax spin-off would satisfy Sprint investors who are skeptical but allow investors who are bullish on the new technology to make a pure-play bet on it. Meanwhile, a combination with Clearwire would provide the spin-off with much greater stability and make additional funding from strategic players much easier. Combined, these factors make S a stock worth watching!

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MedQuist Inc. (OTC:MEDQ) announced today that it was considering a sale of the company in light of its previously-disclosed review of strategic alternatives shortly after Dutch Philips Electronics (NYSE:PHG) revealed that it wanted to sell its 70 percent stake in the medical transcription and document service provider. Shares in the company jumped over five percent on the news.

MedQuist has faced many problems recently after a series of investigations by the SEC and Philips Electronics threat to sell its 70 percent stake at a loss. The company quickly resolved its problems with the SEC and purchased all of the software and licenses that it needs from Philips Electronics. The company is now current in all of its SEC filings and owns all of the front-end software that it uses with clients to accept transactions.

Now, MedQuist is turning its attention to the possibility of a sale. CEO Howard Hoffman noted in a recent conference that there are three investment groups that have a five percent or greater ownership stake in the company besides Philiips, so "anything is a possibility" regarding future ownership. Since the 70 percent stake owned by Philips could likely be sold on the cheap, there are many financial buyers that may be willing to take a stab at the company.

Strategic buyers may also surface as continued consolidations are still likely in the fractured medical transcription industry. MedQuist's front-end speech recognition technology may also be something that other companies may eye. "I think radiology will convert completely to front-end and some of the medical specialties," said Hoffman. And at these fire-sale prices, there is sure to be at least some interest by strategic players.

In the end, the company is well positioned to sell itself at a substantial premium. The majority shareholder is determined to sell its stake at any price to write-off the investement while the company has resolved all of the major issues it has faced with the SEC that could have been hurdles to any transaction. And finally, there is a lot of potential interest from strategic and financial buyers. Combined, these factors make MEDQ a stock worth watching!

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Peabody Energy (NYSE:BTU) announced that it has completed the spin-off of its coal asset and operations into a new public company called Patriot Coal (NYSE:PCX). Peabody shareholders received one share of PCX for ever 10 BTU shares that they owned in a special dividend distributed today. Shareholders are hoping that this new spin-off can help unlock value.

"Completing this spin-off was a key element in transforming our business portfolio," said Peabody Chairman and Chief Executive Officer Gregory H. Boyce. "Peabody and Patriot will both benefit by a distinct business focus and growth opportunities to build shareholder value. Peabody remains focused on high-margin, high-growth markets by expanding globally and building on our leading U.S. position in the Powder River Basin, Colorado and the Midwest."

Patriot Coal is worth watching because spin-offs tend to outperform the overall market within the first two years. Traditionally, parent company shareholders are inclined to sell off their stakes in the new company due to limitations on holdings for institutions or personal preference for individuals. Management in new spin-offs are also more heavily incentivized to perform than usual, which makes the first year a turning point. Combined, these factors lead to a depressed share price that tends to substantially recover in year two.

In the end, spin-off companies are always worth watching due to their statistical advantage over the rest of the stock market. This company in particular is worth watching since it is in the coal industry that it already undervalued. Any recovery in the market combined with strong performance in the company itself could yield substantial returns for investors willing to wait a couple of years. These factors make PCX a stock worth watching!

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Luby's, Inc. (NYSE:LUB) has decided to fight back against a syndicate of activist hedge funds looking to take over its board. The company announced a broad program aimed at appealing to institutional investors in an effort to turn them against the hedge funds' proxy campaigns. The company is concerned that the hedge funds will use the board control to improve short-term shareholder value at the expense of long-term growth.

Ramius Capital - the head hedge fund in the fight - nominated four candidates to Luby's board of directors saying that it will strengthen the quality of the board by adding valuable restaurant industry and corporate finance expertise. Moreover, the hedge fund believes that the nominees and prove valuable in helping management evaluate and execute on its new growth strategy, explore various strategic and financing alternatives to enhance shareholder value, and ensure that the company is being run solely for the benefit of shareholders.

Luby's sent an open letter to shareholders arguing against voting Ramius affiliates onto the company's board of directors. The board insisted that they were committed to creating value for all of Luby's shareholders. Under their guidance, the company has returned to profitability, eliminated more than $120 million in debt, experienced same-store sales growth, improved overall product offerings and improved store-level execution.

Luby's CEO and COO - Chris and Harris Pappas, respectively - have also extended their employment contracts through 2009 without an increase in salary. The two have also invested an additional $11.2 million into the company, bringing their stakes up to 24% of outstanding shares. Nobody has a greater stake in the company than these two officers.

The board also insisted that they have been very open with all shareholders. Recently, some of them recommended that the company releverage its balance sheet through the sale and leaseback of real estate; however, the company determined that keeping the real estate is in the best interest of shareholders long-term. Owning rather than leasing property generates better operating margins and greater cash flow returns.

Finally, the board outlinedthe Luby's new strategic growth plan. First, the company wants to grow its footprint by building 45 new stores over the next five years that will focus on a fast casual dining experience. Secondly, the company wants to continue updating existing locations. And finally, the company wants to expand its culinary contract services business, which has grown to eight accounts so far this year.

In the end, sometimes activist hedge funds aren't doing what's best for everyone in the long-term. Ramius' motives are still unclear, but typical actions taken by activist hedge funds are designed to unlock value in the short-term. The proposed sale and leaseback of property is one great example of this type of activity. Regardless, LUB is definitely a stock to watch!

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Sprint Nextel (NYSE:S) hit a new 52-week low today after it announced lower revenue and earnings on a net decline of 60,000 wireless subscribers in the third quarter. This contrasts to substantial additions of new subscribers at rival companies AT&T and Verizon Wireless. The company also said that it expects net customer additions to continue to be pressured in the fourth quarter.

Sprint has been underperforming its industry for some time now. The company's recent quarterly revenue growth came in at just 1.5% compared to an industry average 19.2%. Meanwhile, the company's stock is trading at 140x earnings while the industry sits at 23x earnings. Even the company's PEG ratio - which accounts for growth - is substantially higher than the industry's ratio.

Sprint's strong top and bottom line growth in recent years seems to be slowing down considerably as it has hit more competition. The company's latest earnings announcement disappointed investors that have become accustomed to an average 7.5% earnings surprise. Meanwhile, the company continues to be overvalued and trading at just 5x times cash flow, indicating that investors are assigning little value to the company's non-cash assets and earnings potential.

Problems are only compounded when we take a look at Sprint's competitors. AT&T added two million subscribers during the same period while Verizon added 1.6 million subscribers. The company said it plans to combat this by simplifying its pricing plans and other packages available to customers and eventually finding a replacement for ex-CEO Gary Forsee.

In the end, Sprint shares deserve to be trading at their current levels right now. The company is struggling to keep up the growth rates that Wall Street is accustomed to while many of the company's new initiatives (such as WiMax) remain unproven. Regardless, S is definitely a stock to watch going forward.

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PDL Biopharmaceuticals' (NDAQ:PDLI) list of shareholders is quickly becoming a who's who of activist hedge funds as yet another one joins the fight to unlock value for shareholders. Many are hoping that this additional representation will help the finally put the company over the edge and force a sale.

Daniel Loeb's Third Point slashed its stake in PDLI, from 9.7 percent to 5.1 percent, after the company refused to grant the activist investor a board seat, according to a Schedule 13D/A filing with the SEC. The news sent shares plunging down four percent before leveling out as shareholders speculated that the activist no longer saw value in the investment.

"Despite these positive developments, we are disappointed that the sale process is still being led by a board that does not include a Third Point representative, and that Patrick Gage remains the company's CEO, despite having demonstrated his unsuitability," said Loeb in a letter to the board.

Amid this selling, however, a relatively new buyer has emerged. Highland Capital unveiled its own 5.2 percent stake in the company for the first time in a Schedule 13D filing on October 29th. The activist hedge fund has been buying up shares on the open market up until October 22nd. They also sent a letter to the company's board in September making several demands.

Highland suggested that the company (1) seek additional expertise in evaluating the complex range of alternatives available for its royalty stream, (2) proactively pursue selling the entire company, (3) communicate to the market that it is doing so, (4) encourage Gage to resign as chairman, (5) encourage McDade to resign as CEO, (5) appoint Laurence Korn as chairman, and (6) add a shareholder representative to the board.

In the end, this is all great news for shareholders. While it is unfortunate that Third Point sold a part of its stake, it is reassuring that Highland stepped up to make the purchase. Clearly, some of Highland's demands have already been met and it will be interesting to see if the company follows through on the others. Regardless, PDLI is definitely a stock to watch!

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Point Blank Solutions Inc. (OTC:DHBT) shares spiked nearly 20 percent earlier this week after it received an unsolicited buyout offer for $5.50 per share over a year after the company began exploring strategic alternatives. New York hedge fund Steel Partners initially approached the company two months ago but made the offer public after a lack of response from the company.

“We are confident that our proposal represents the best strategic alternative available to immediately maximize shareholder value for the Company and its public shareholders,” Warren G. Lichtenstein, Managing Member of Steel Partners stated in the letter. The hedge fund also stressed its extensive experience working with and maximizing the value of other public companies in the defense industry.

Steel Partners' offer comes just a week after its former CEO David Brooks was indicted on various fraud charges along with two other top officials. Brooks pleaded not guilty to sercurities, tax and accounting fraud charges. However, the entire ordeal has left the board in a difficult position trying to overcome the stigma associated with a criminal investigation and several arrests of key officers. This may make it difficult for management to keep the company.

Many shareholders believe, however, that Steel Partners may have to raise its offer to $6.50 to $7.00 in order to attract enough shareholders to make the deal happen. The hedge fund itself also noted that it would be willing to upwardly adjust the offer price to reflect any additional value that it may find through due diligence, so we know that such an adjustment is not out of the question.

Overall, this is great news for shareholders as it could provide them with a windfall of cash along with an escape from the criminal problems facing the company. While Point Blank has been rather keen on a turnaround, it may be difficult to convince shareholders that this turnaround is a better alternative than such a high buyout premium. Combined, these factors make DHBT a stock worth watching!

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Pacific Sunwear of California (NDAQ:PSUN) announced that it has hired Financo Inc. as its financial advisor to explore strategic alternatives for its demo chain of stores. The company said that it would explore alternatives for its demo stores, which sells urban-inspired clothing, and close its One Thousand Steps shoe boutiques. Shares in the company have risen more than eight percent since the original announcement as shareholders applauded the move.

Wall Street has complained for years that the demo stores were a drain on profits at Pacific Sunwear. The 154 demo stores and 9 One Thousand Steps stores combined for form a pre-tax operating loss of $21 million in the first three quarters of fiscal 2007. The demo stores saw its same-store sales decline more than 15% on top of a 17% drop last month. Many investors and analysts believed it was time just to dump the chain.

Pacific Sunwear is now looking to focus on turning around its PacSun change instead of trying to half-heartedly enter any new markets. The PacSun stores posted a 2.7% same-store growth number that outperformed many other teen-orientated retailers like American Eagle and Gap, which reported negative same-store sales for the quarter. The sale of these two chains should provide the company with ample cash to fund a turnaround to boost profitability even more.

Pacific Sunwear may also be a bargain with a price-to-sales ratio of just 0.76, which is less than half that of its competitors. The company's 2.26x book value is also an attractive valuation given that management has taken action to unlock value through the sale of these two chains. If the company can work to turn itself around and swing to a profit on stronger earnings, then this stock could be worth substantially more than it is now - and the sale of these two chains is a step in the right direction.

In the end, Pacific Sunwear still has a long way to go before it can become a successful apparel retailer. Its operating performance is has been very poor while its weak cash situation raises concerns about its outlook. Meanwhile, the company is experiencing very poor top and bottom line growth. This has created a relatively low valuation for the company that could become attractive if it is able to successfully turnaround its PacSun business. Combined, these factors make PSUN a stock worth watching!

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