Time Warner Inc. (NYSE: TWX) finally announced that it will separate its majority-owned cable division after months of speculation. The media giant offered few details of how it would structure the transaction, but said that a complete separation of the 84% stake is in the best interest of both companies' shareholders. The announcement also comes at a time when Time Warner is struggling to revive its AOL unit and lift the margins on its film and television businesses.

Investors should watch this situation carefully as it could mean opportunity for profit. A transaction structured as a spin off could mean huge value creation for shareholders of Time Warner Cable (NYSE: TWC), but only after a few months. The theory is that most TWX shareholders that receive TWC stock in a spin off situation will sell it, which will put substantial downside pressure on TWC despite no change in fundamentals.

The selling pressure would drop the share price and reduce Time Warner Cable's earnings multiple. This undervaluation could persist for some time, but will likely be corrected when the next earnings announcement is made and analysts recalculate where the shares should be at historic multiples. These analysts will then likely upgrade the stock and recommend that investors pick up more shares to take advantage of the undervaluation.

Many investors are also closely watching the parent Time Warner in the event of a sale of its stake. This would generate substantial proceeds for the parent company that it could use to fund a share buyback program or boost dividends to unlock value. Share buybacks reduce the number of outstanding shares and therefore increase the earnings per share number and eventually the earnings multiple. Meanwhile, boosting dividends also typically leads to a higher valuation due to common investment models put in place to value companies.

In the end, there are many different routes that Time Warner could take to get rid of its stake and all of them are worth watching. Instances like these often provide investors with the ability to profit handsomely!

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Auto-part maker Lear Corp. (NYSE: LEA) is up more than 20% after announcing surprising first quarter results. The Michigan-based company defied the weak economy by posting a 57% increase in profit from a year earlier while reaffirming its full-year earnings outlook.

Not ignoring the slow U.S. automarket, Lear Chariman, CEO and President Bob Rossiter said, ""Although we are facing significant challenges in North America, Lear's underlying operating fundamentals remain strong."

The world's largest automotive seat maker reported profits of 64 cents per share compared to expected earnings of only 48 cents per share. Though revenue fell, it still managed to beat expectations.

Most importantly, Lear raised its 2008 revenue projections from $15 billion to $15.5 billion - showing that the company can persevere through a possible vehicle sales downturn. The optimistic first quarter report led to a slew of analyst upgrades of the company's stock to "buy" and "outperform." For the time being, it seems like Lear is immune to the bigger problems facing the U.S. automotive sector.

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BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS) posted record earnings once again after rising oil prices bolstered profits at the two large gas companies. BP reported a 63% jump in its first quarter net income while Shell announced a 25% increase in its profits. Both companies attributed the better-than-expected profits to higher oil prices that beat expectations across the board. And the news only gets better as oil continues to head higher.

Companies like BP and Shell make money by selling gasoline and crude oil to consumers and companies. Since their profit margins remain the same as a percentage of sales, their net income has increased along with the higher dollar volume spent at the pump. For example, assuming the company makes 20% profit on its sales, a consumer will pay $0.20 for $1/gallon prices but $1 for $5/gallon prices. As you can see, the sharp rise in gas prices sparked a sharp rise in net income.

Oil prices set a new record $119.93 in New York yesterday before profit-taking ensued today. These prices have remained pressured amid an uptick in militant attacks in Nigeria, however. The Movement for the Emancipation of the Niger Delta has stepped up its attacks on pipelines recently in an attempt to reduce the nation's crude exports. However, overall output came in higher-than-expected at 3.52 million barrels a day compared to analyst estimates of 3.37 million per day. This news sent oil prices lower on the day, but prices are still expected to remain high.

ConocoPhilips and Cheveron are also expected to report better earnings this quarter on May 1st and 2nd, respectively.

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Billionaire activist investor Kirk Kerkorian is making waves Monday by announcing that his Tracinda Corp. not only has amassed 100 million shares of Ford Motor Company (NYSE: F), but that he is making an additional offer of $8.50 per share for another 20 million shares.

Worth more than $18 billion largely from plays in Las Vegas, Kerkorian nonetheless has a history of entangling himself with other Detroit automakers like General Motors Corp. (NYSE: GM) and Chrysler. This announcement is a signal that he has faith in the turnaround efforts of Ford CEO Alan Mulally.

With the purchase of an additional 20 million shares, Kerkorian would have more than a 5% stake in Ford, a company still dominated by family interests. Despite going public in 1956, the descendants of Henry Ford still control 40% of the voting rights in the company - and given their track record, this almost definitively rules out and acquisition. This is important because such a rapid accumulation of shares by an outsider is often a build-up to a take-over attempt.

Kerkorian's logic in building such a large stake in Ford remain somewhat mysterious. Though the company reported a surprising first quarter profit, it still expects to lose money overall in 2008. Ford's truck and SUV-dependent lineup continue to be a huge liability with record gas prices.

According to a release Kerkorian, though his company, said "Tracinda has been following Ford closely since the company released its fourth quarter 2007 results which indicated that Ford’s management was starting to achieve highly meaningful traction in its turnaround efforts. Last week this was reinforced by Ford's first quarter 2008 results, achieved despite the difficult U.S. economic environment. Tracinda believes that Ford management under the leadership of Chief Executive Officer Alan Mulally will continue to show significant improvements in its results going forward."

Whether Kerkorian proves to be right, only time will tell, but for now Ford faces an uphill battle.

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RadioShack Corporation (NYSE: RSH) shares fell more than ten percent on the day after the company posted a sharp drop in first quarter earnings. The electronics retailer reported that its profits fell 9 percent, hurt by weak results from its Sprint wireless partnership. Meanwhile, sales fell four percent but managed to come in ahead of expectations.

"We are pleased with the overall outcome for the first quarter of 2008, especially in light of the difficult economic environment. After a very challenging month of January, our sales and earnings trends improved significantly during February and March, resulting in an average comp store sales decrease of 1.2% for the two months," said Julian Day, Chairman and Chief Executive Officer.

The real driver that brought the stock down were bearish comments made by analysts. They noted that the company's lack of a sales pullback was impressive, but it came at a cost. Operating margins missed forecasts and declined for the first time in six quarters. Meanwhile, inventory growth outpaced cost-of-goods sold growth for the first time in eight quarters.

RadioShack has been working to effect a turnaround in recent months, having closed some 500 stores and trimmed other expenses. Analysts noted that these changes have resulted in better stores, but the items in these stories still suffer from lower gross margins and could prove to be a barrier to gross profit dollar growth.

In the end, RadioShack may not seem to be affected by the recession given its better-than-expected sales and earnings, but a quick look beneath the hood unveils continued problems with operating margins that are only exacerbated by issues with its Sprint partnership. Combined, these factors led to today's drop in shares.

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ExpressJet Holdings Inc. (NYSE: XJT) today announced that it unanimously rejected an all-cash offer by SkyWest Inc. (NASDAQ: SKYW) to acquire the company for $3.50 per share.

ExpressJet said it believes SkyWest's $3.50 per share offer substantially undervalues the company's true value and outlook. "The initial SkyWest offer is inadequate and represents an opportunistic attempt by SkyWest to acquire the company at a price well below the true value that ExpressJet would bring to a combination," ExpressJet said in a statement.

With the difficulty across airline companies reflected in their current trading price - Skywest is trading near its 52 week low and ExpressJet was hovering around its 52 week low prior to this announcement - consolidation has become an attractive option based not only on valuations but long-term survival.

SkyWest's offer represents almost a 70% percent premium over ExpressJet's Thursday closing price of $2.09 per share and values the company at nearly $182 million. SkyWest CEO Jerry C. Atkin said in a letter to ExpressJet that the offer represented a "full and fair price" for the company.

Atkin wrote, "We believe that our proposal would be in the best interests of ExpressJet and its stockholders, particularly given the uncertainty in the airline sector, the high price of oil and, as outlined in your public filings, the risks of your business related to your relationship with Continental."

The risks of ExpressJet's relationship with Continental Airlines (NYSE: CAL) stem from ExpressJet mainly operating regional flights as a contractor for the company rather than having its own routes and name recognition. In other words, the company is largely at Continental's mercy right now.

ExpressJet is going to start a review of its options, but in this climate the reality is SkyWest's offer may be as good as it gets for a small, regional carrier like ExpressJet.

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Ford Motor Co. (NYSE: F) shocked most analysts with a first quarter profit of $100 million compared to a loss of $282 million for the same period last year.

CEO Alan Mulally’s turnaround plan for the company is based on heavy cost reductions – such as cutting expensive North American jobs – combined with new vehicle models. In the face of $15.3 billion in cumulative  losses in the last two years, this modest profit may show that Mulally’s plan is working.

Of course profitability is very important but Ford still faces an uphill battle against domestic competitor General Motors Corp. (NYSE: GM) and the world’s top car company (by the only measure that matters – profits) Toyota Motor Corp. (NYSE: TM). Making matters worse with its dependence on trucks, Ford’s vehicle lineup is ill positioned for record-high fuel prices. On the company’s home turf, a soft economy will only worsen demand in the U.S., a market that Detroit-based Ford has lost market share in every year for more than a decade.

Making matters worse, despite recent improvements in initial vehicle quality according to studies commissioned by Ford, the company admits that about half of vehicle shoppers no longer even consider its models.

This surprise profit is certainly good news for Ford – up more than 15% at midday today – but is it too little too late?

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United Parcel Service Inc. (NYSE: UPS) has seen only a slight increase in their first quarter profit of 7.5%. This lead the company to lower their 2008 earnings forecast.  This is due to the US economic recession that will not make a turn for the better any time soon. The slow retail sales are causing a slow period for UPS and their delivery services, particularly domestic deliveries.  When the US economy is hurting, UPS takes the hurt two-fold.

United Parcel Service Inc. handles an average of 15 million shipments a day world-wide, or roughly 2 to 3% of the U.S. gross-domestic product. With the US economic slump, people are spending less on retail products as they are forced to spend more on inflated gas and food prices.

UPS is not alone.  Major US have tightened spending and taken other cost-cutting measures to withstand the economic slowdown. This has lead to a restraint among US demands for freight deliveries for more than a year with rising fuel costs remaining the unpredictable variable that is squeezing profits. UPS spent $950 million in the quarter for their vehicles, up 54% from the year earlier. The company said its overall fuel costs drove down profit by at least 2 cents to 3 cents a share, or by $30 million to $50 million.

The first quarter reflected write-downs and severance charges in the year-earlier period and strong growth in business outside the U.S. Net income for UPS was $906 million, or 87 cents a share, up from $843 million, or 78 cents a share, from the year earlier.  Revenue climbed 6.5% to $12.68 billion.

The Atlanta-based UPS delivery service is the largest in the world.  International sales have protected UPS from being packed away into the US closet. Revenue from overseas packages jumped nearly 16%. UPS said US export volume growth was "strong, leading to a balanced global performance with Asia, Europe and the U.S. each experiencing a double-digit increase."

Like FedEx, UPS is considered to be a barometer for the U.S. economy as a whole. Fewer deliveries by transport companies are seen as a sign that domestic business is slowing down, while the factors behind the declines provide the supporting thesis. In this case, higher fuel costs are prompting a rise in delivery costs while consumers are likely spending less money.  

Mr. Kuehn, CFO for UPS, said, "At this point we see no immediate signs of economic improvement. We expect the U.S. package market to be flat to down this year. … Domestic margins will be under pressure for rest of year."

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Liberty Mutual Group Inc., a property and casualty insurer, announced it is buying Safeco Corp. (NYSE: SAF) for about $6.2 billion. The sale is the biggest U.S. property and casualty insurance deal since St. Paul Cos. and Travelers Property Casualty Corp. completed a $17.9 billion merger four years ago.

Industry analysts expect more deals to come as a soft economy has created attractive pricing and more willingness to deal. The property and casualty insurers that are cash-rich often take such opportunities to make attractive acquisitions.

"The addition of Safeco significantly expands and strengthens [Liberty Mutual]", CEO Ted Kelly said in a statement. The deal will create the fifth-largest U.S. property and casualty insurer according to the press release for the news.

More than strengthening Liberty Mutual, the deal strengthens the pocketbooks of Safeco shareholders. Liberty Mutual will pay $68.25 a share in cash for Safeco, a 51 percent premium over yesterday's $45 closing price.

Safeco shares are up over 46% as of morning trading to over $66 a share.

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UAL Corporation (NDAQ: UAUA) shares dropped nearly 40 percent after the carrier was slammed with skyrocketing fuel costs. As a result, the United Airlines parent was forced to reduce its domestic business to maintain adequate liquidity. Analysts also expressed doubts on a conference call that debt covenants may experience problems, although this was quickly dismissed by the airline's Chief Financial Officer.

The quarterly decline also prompted the troubled airline to revise its five-year plan that it was forced to make when it emerged from bankruptcy. Now, UAL plans to reduce its domestic capacity by 9% by the end of the year; eliminate 30 older aircraft from its operations; target another $200 million in nonfuel cost savings; cut another 1,100 jobs; and reduce planned capital spending in 2008 by about $200 million.

The trouble airline carrier also commented that it would participate in mergers and acquisitions when and if the right deals became available and it made sense for employees, customers and shareholders. However, UAL did not comment on reports that it is involved in a potential combination with Continental Airlines. Although, investors already know that the two parties have held advanced talks in the past!

The argument for consolidation in the industry lies on the fact that a larger entity will be able to collectively bargain for more favorable terms for fuel and other expenses. Meanwhile, the larger capital base will give it the ability to raise more financing on better terms and remain better capitalized. Combined, these factors have convinced many analysts that mergers like the proposed one between Delta and Northwest may give them a shot at sustainable profitability.

In the end, UAL Corporation still has a long way to go before it gets out of this mess. Any consolidation may be welcomed by shareholders who are now sitting on substantially greater losses. However, absent of any such deals, the airline may have to continue cutting while it waits for fuel prices to lower in the future to relieve pressure on its margins.

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AT&T Inc. (NYSE: T) announced a 22% increase in first quarter net income due to strong growth in wireless operations.

The country's largest telecommunications company had net income of $3.46 billion up from $2.85 billion last year. The highlight was earnings of nearly $3 billion by AT&T's wireless unit - double the unit's profit first quarter last year - on an 18% increase in revenue. Strong subscriber growth and increased revenue per subscriber, due to more expensive plans that feature Apple Inc.'s (NDAQ: AAPL) iPhone for instance, are driving AT&T's wireless resurgence.

The wireless unit added 1.3 million new subscribers to reach over 71 million total subscribers as of the end of March, all while increasing average revenue per user by 2% to over $50. Nearly half of this increase in subscribers were prepaid customers that are generally not as desirable because they use less expensive plans and are prone to switch carriers more often.

This wireless strength is needed to balance the continued decline of the company's landline business. The so-called "wireline" business unit posted a 2% drop in earnings and revenue. In a sign of the shifting business environment, the company recently announced plans to lay off 4,600 employees in an attempt to streamline its wireline business - approximately the same number of employees the company plans to hire back for its other units.

The real question moving forward is whether AT%T wireless, in a cutthroat sector, can continue to buttress the wireline business as it fades to obsolescence.

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Caterpillar Inc. (NYSE: CAT) who produces heavy industrial equipment reported last Friday the company’s record first-quarter sales and profit. The Peoria, Illinois-based company had seen a 13% rise this past March in its net income.  As well, the company’s overall business is doing very well abroad, despite rising material costs and currency issues with the ever so weak dollar.  The company today has seen an increase around 6% among its share value, which nowadays is a rare feat in the US market.
 
However, as Caterpillar, Inc. is doing very well for itself outside of the US, it has seen a slight trim in both it US and global forecast.  Caterpillar is still bulldozing through the rubble as Caterpillar’s Chief Executive Jim Owens wrote that there is a "robust demand for products used in the global mining and energy industries and for machines used by our customers to build infrastructure, particularly in emerging markets."

"Even though North America, our largest geographic market, is depressed, we are investing for growth," Owens said, adding that the company is "significantly" increasing capital expenditures.  The company, however, has trimmed its forecast for global economic growth to below 3% for 2008.
 
Caterpillar is playing in the sandboxes of Russia, China, and India to benefit their long-term strategies.  Despite the company did see a 3% rise in machinery and engine sales in North America in the first quarter, Caterpillar’s European revenues climbed 30% and Asian business was 37% higher.  Sales outside of North America accounted for 58% of total revenue, versus 53% of the total a year ago.

The Illinois-based group reported net income of $922 million, or $1.45 a share, up from $816 million, or $1.23 a share, a year earlier. Net sales rose 18% to $11.8 billion. The latest mean estimates of analysts polled by Thomson Financial were for earnings of $1.33 a share on revenue of $10.77 billion.  Currently, the company’s shares are trading just under 8% and trading at $84.80, nearing its 52-week high of $87.

Caterpillar still foresees its earnings for 2008 to grow 5% to 15% on revenue increasing 5% to 10%. It lowered its outlook for North America sales, but the company strongly believes that the demands and business abroad are going to hold the company above water, as the rest of the US economy seems to have slowed immensely due to construction zones.

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Both Continental Airlines (NYSE: CAL) and Southwest Airlines (NYSE: LUV), the two most financially-secured airlines have hit turbulence in the wake of the rising gas prices.  The basic equation shows that as fuel prices sky-rocket, the airlines hit turbulence and will have to ground themselves, if you will.  Southwest has been one of the only airlines to see profits for the last several quarters.  However, the company has finally seen the same turbulence that has been giving other major airline carriers financial problems due to such high fuel costs.

Continental and Southwest Airlines will both attempt to fight the fuel battle by raising prices.  Southwest Airlines Co. which always has deals for travelers for its select domestic locations had to raise its summer prices last week, only then to raise them an additional $10  for flights each way from mid-June through mid-August.  In addition to raising prices, Southwest will have to postpone their plans for fleet expansion.  

The leading low-cost carrier Southwest Airlines Co., headquartered out of Dallas, Texas, has been the only airline company to see a profit this first quarter.  The company’s revenue rose 15.1% to $2.53 billion.  Although the company had reported a profit, they still saw a decline in their numbers as they earned only $34 million, or 5 cents per share, in the first quarter compared with $93 million, or 12 cents per share, a year earlier.

Continental Airlines, the fourth-largest airline carrier by passenger volume, has reported a first-quarter net loss of $80 million, or 81 cents a share, compared with net income of $22 million, or 21 cents a share, a year ago.  Due to the Houston-based company’s large international traffic, Continental’s revenue rose 12% to $3.57 billion.

Continental claims that they will take 14 older, less fuel-efficient aircrafts out of service.

Continental, in addition, will remove 34 of its older fleet of Boeing 737-300’s. Continental’s reduction of their older fleet will reduce the U.S. mainline capacity by 5% this upcoming Fall. “In this fuel environment, we must reduce our domestic capacity to help reduce our losses in the domestic system," said President Jeff Smisek.  Continental and Southwest Airlines will be cutting seat capacity to reduce routes that aren’t providing the airline companies with sufficient funds.  This is a first among U.S. airlines this year to trim domestic capacity even if it cuts their share of the market.

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Google Inc. (NDAQ: GOOG) announced high-than-expected net income of $1.55 billion on $5.19 billion in revenues. The search giant saw a 42% increase in revenue growth compared to the first quarter of 2007 and a 7% increase compared to the fourth quarter of 2007. The strongest growth was seen in international revenues, which finally increased to more than half of its total revenues.

"Our ongoing innovation in search, ads, and apps helped drive healthy growth globally across our product lines, yielding another strong quarter for Google," said Eric Schmidt, CEO of Google. "As we integrate DoubleClick into our advertising platform, we see exciting new ways to improve the user experience and increase value for our advertisers and partners. Also, while exercising operational discipline, we continue to explore opportunities that add value to users everywhere and to Google in the long term."

Google reported that 66% of its revenues were derived from websites that it owns compared to 33% from its content partners. This marks a continued shift towards creating its own revenues, which is much more profitable in the long-run. The search giant also noted that its acquisition of DoubleClick was immaterial to revenue and only slightly dilutive to both GAAP and non-GAAP operating income, net income and earnings per share for the first quarter.

The stock jumped 10% after hours on the news as investors breathed a collective sigh of relief. Many were concerned that the company would post a loss following weakness in pay-per-click advertising predicted by research firm comScore. The huge surprise to the upside has many investors newly bullish on the stock and confident that it will be able to overcome any difficulties in the U.S. economy.

In the end, these factors make GOOG a stock worth watching going into the future. Many are hoping that this news will provide a boost to the technology sector that is already fresh off of good news from IBM.

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Bill Ackman's Pershing Square offered to purchase Borders Group's (NYSE: BGP) businesses in Australia, New Zealand and Singapore for $135 million in a Schedule 13D/A filing with the SEC. The expected offer comes after the activist hedge fund recently completed a financing agreement with the bookseller that gave it a much-needed capital infusion.

Borders insists that the international units are worth substantially more than the $135 million offer and is looking at strategic alternatives other than the offer from Pershing Square. So far, the bookseller has not made any public announcements of a higher bidder but there is still a lot of time remaining.

Pershing Square also valued Borders' UK and Singapore businesses at $67.5 million in the event that it could not acquire the other businesses or the company wished to keep or sell them separately. Many of these international businesses remain strong despite a slowdown in the United States and could make a great acquisition for other booksellers.

Borders has found itself under pressure from lower discretionary spending by consumers and increased competition from online retailers like Amazon.com (NDAQ: AMZN). The bookseller is hoping that this latest capital infusion will give it the capital necessary to implement a series of strategic initiatives designed to improve sales and increase profits.

Shares dropp $0.02, or 0.31%, to $6.43 on the day.

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With the rising costs of fuels, many airline companies seem to be grounded, some literally.  However, one merger has brought on not only a way to battle the ever so large economic struggle of the airline industry, but will have created the world’s largest airline.  Delta Airlines (NYSE: DAL) and Northwest Airlines (NYSE: NWA) have officially joined together in a union that will parent 75,000 employees with revenues of $35 billion.  

The $17.7 billion Delta Air Lines Inc. merger with Northwest Airlines Corp. is done.  However, as it may seem that this much anticipated deal would be good for both companies, Delta shares have undergone quite the drop in share prices today with over a 13% decline.  Northwest shares also fell, but just under 9%.  The companies, that jointly announced their merger last night at 8 PM EST, will keep Delta’s headquarters out of Atlanta and foresee no hub closures.  Collectively, the two airlines will oversee a fleet of 800 airplanes with flights to more than 390 destinations in 67 countries.

The deal will grant that each Northwest share will be exchanged for $1.25 Delta shares, a 16.8%  premium based on today's closing price.  With this merger, it is predicted a one-time cash costs of no more than $1 billion to integrate the two airlines. However, the deal is expected to generate more than $1 billion in annual revenue and cost cuts from more effective aircraft utilization, a more comprehensive and diversified route system, reduced overhead and improved operations.  Delta CEO Richard Anderson, who had also served as a former CEO of the Eagan-based Northwest Airlines, will remain CEO of the new Delta.  Delta Chairman of the Board Daniel Carp will become chairman of the new board, Northwest Chairman Roy Bostock will become vice chairman and Delta's Ed Bastian will be president and CFO.  

This new merger between Northwest and Delta Airlines will Delta will maintain executive offices in Atlanta (as the company’s headquarters), Minneapolis/St. Paul and New York, and international executive offices in Amsterdam, Paris and Tokyo.

The airlines said small U.S. communities will now have better access to more destinations across the globe and will benefit from the combined carriers' complementary route networks.  However, there are many concerns, especially in  a time of tight budgets and strict government regulations.  Northwest and the state of Minnesota are to maintain current hubs and headquarters, and if Northwest fails to abide by this, the company would owe the state $240 million and lose a package worth $200 million. After the merger was announced Monday evening, Minnesota’s Gov. Tim Pawlenty issued a statement claiming that "We will be closely scrutinizing the impact of the merger and will strongly stand up for Minnesota's interests during the review process."

With such a merger as this,  there are some issues to be dealt with concerning the unions of the two airlines who were unable to come to an agreement on combining seniority lists. Seniority determines pay and flight assignments, and Delta's pilots (generally younger than Northwest's) had worried that they would receive the short-end of the stick.  Officials had wanted the pilots to agree prior to a deal, but faced with ever-rising operating costs ultimately decided to move ahead with the merger without an agreement.

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Affymetrix, Inc. (NDAQ: AFFX) shares plummeted after the company reduced its first quarter expectations to $170 million, including an intellectual property payment of $90 million. The life sciences company also reduced its full-year estimates from an earlier range of $505 million to $525 million to a new range of $490 million to $510 million. The reduction comes as a result of lower research spending by pharmaceutical and industry customers.

The troubled Affymetrix is currently exploring ways to reduce expenses in order to at least partially offset the impact of this revenue reduction. So far, it has laid off 23 people in West Sacramento and plans two more rounds of job cuts in the near future in order to further reduce its operating expenses and overhead. More extreme measures could be taken in the future if revenue reductions continue to persist.

Currently, Affymetrix trades at around 60x earnings for 40x future earnings. Its lackluster growth rate gives the stock a PEG of 1.36, which means it may be slightly overvalued. The company also lags its peers with a 3.3% growth rate compared to a 10.3% growth rate for its peers and a 6% growth rate for its nearest competitor. Affymetrix's operating margins are also well below their peers despite a higher growth margin. This suggests that its costs tend to be higher than its peers and could be substantially lowered in order to more effectively compete.

Perhaps the only largest upside is the massive amount of cash on the books. Affymetrix has a whopping $494 million - or $7.13 per share - in cash on its books. This accounts for nearly 70% of the stock's current market value. Clearly, value could be unlocked here if the company began a share buyback program or distributed a special dividend. Combined with cost cutting measures, this stock could quickly become one worth watching!

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Blockbuster Inc. (NYSE: BBI) announced that it offered to acquire Circuit City Stores, Inc. (NYSE: CC) today for at least $6.00 in cash, subject to due diligence. However, Circuit City failed to provide the due diligence necessary to make a definitive proposal and effectively blocked any transaction. Now, Blockbuster is making the proposal public in order to put pressure on the electronics retailer and allow shareholders to participate in the destiny of the company.

"Our proposal offers Circuit City a significant premium to its existing stock price and creates a game-changing retail concept with a sustainable competitive advantage. We believe the combination will result in a compelling consumer proposition that will drive significant revenue and margin enhancements as well as cost synergies," said Blockbuster Chairman and CEO Jim Keyes.

Blockbuster insists that the combination of the two companies would result in an $18 billion global retail enterprise uniquely positioned to capitalize on the growing convergence of media content and electronic devices. It would also allow both companies to benefit from the revenue growth generated by their complementary products, while the resulting synergies would substantially improve consolidated financial performance, thereby increasing shareholder value.

Given Circuit City's $3.90 per share price, this transaction would represent a substantial premium for shareholders. Meanwhile, Blockbuster shareholders would benefit from an obvious diversification away from the troubled DVD rental market and into consumer electronics. In the end, Circuit City shares may be depressed but a turnaround could take years to affect. As a result, this is an offer that will definitely be considered.

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Many department stores have traditionally set themselves apart by installing in-house labels and designer lines made exclusively for them. The move was designed to produce higher profit margins than national brands when times were good, but many fear that the strategy could come back to haunt them now that the markets have turned. Many stores are being forced to mark down the prices of such exclusive lines in a move that could end up hurting the brands' image.

Unfortunately, retailers are also unable to siphon off some of the pain to suppliers since they are themselves the manufacturer. This means that instead of the markdown allowances that national brands provide, these retailers are stuck with even greater losses than they have already experienced. In effect, the strategy is a "double edged sword" says one analyst with Deutsche Bank.

To make matters worse, many retailers are also forced to pay minimum royalties to the brand designers. The WSJ highlighted one such example with Sears Holdings Corp. (NYSE: SHLD) and Kmart, who agreed to pay a minimum of $65 million last year and $20 million this year to Martha Stewart Living Omnimedia despite the lines not meeting sales targets by a long shot.

In the end, many retailers still insist that these products are necessary to differentiate themselves from their competitors. But in a poor economy, it may be wise for investors to start looking at the income states and sales forecasts more closely to see just how much of a retailer's inventory is tied up in these goods.

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In completely predictable move that nonetheless is generating lots of attention, Yahoo Inc.’s (NDAQ: YHOO) largest shareholder has criticized Microsoft Corporation’s (NDAQ: MSFT) threat to wage a proxy battle and lower its offer.

Legg Mason Inc. owns around 7% of Yahoo, giving portfolio manager Bill Miller obvious incentive to try and drive the offer price up.

In a WSJ interview, Miller said, “Telling shareholders you're going to take something away from them is not a way to get their support,” in a reference to Microsoft’s threat to simply pull its bid. Of course, in reality telling shareholders that the deal will soon be off the table seems to be a very good negotiating tactic for Microsoft. Yahoo shares were trading around the $20 per share mark prior to Microsoft’s $29 per share bid, and Yahoo shares are likely to stay around $20 for a long time if the deal doesn’t happen.

Miller would understandably like Microsoft to raise its offer – what Yahoo shareholder wouldn’t? But with no viable alternatives for Yahoo, why should Microsoft bid against itself?

The very need for Miller to speak out against Microsoft’s threat proves the threat is already working: Yahoo’s largest shareholder is worried that the Microsoft deal will disappear.

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The U.S. economy may be headed into a recession, but e-commerce sales are estimated to grow 17% to $204 billion this year. The Forrester Research report sees a continued increase in e-commerce spending as value-shoppers go bargain hunting and affluent investors seeking the comfort and convenience of shopping from home. This is great news for many online retailers as well as online marketing companies.

"From higher shipping costs to changes in consumer shopping habits, online retailers are not immune to the current economic climate," said Scott Silverman, executive director of Shop.org. "But the fact that online sales will increase substantially this year demonstrates the resilience of the channel and is a testament to the value and convenience most customers find when shopping online."

Companies like Amazon.com Inc. (NDAQ: AMZN) and eBay Inc. (NDAQ: EBAY) stand to benefit the most from the increased online spending given their market leadership positions. Unfortunately, much of this growth is already priced into the stocks. Amazon.com trades at 68x earnings with a P/E to growth ratio of 2.19, which means that the stock may be overvalued given its most recent growth. Meanwhile, eBay is trading at 125x earnings with a P/E to growth ratio of 1.25, which makes it a little more affordable.

The Forrester Research report also indicated that search engine marketing continues to be the most effective way to reach new customers. In fact, 90% of all online retailers use pay-for-performance search placement and 79% said they will make such tactics an even greater priority this year. Currently, the survey found that around 35% of all sales comes from search engine marketing venues.

These increases should help boost stocks like Google Inc. (NDAQ: GOOG) who rely on search engine marketing for much of their income. Other potential benefactors include Yahoo Inc. (NDAQ: YHOO) and Microsoft (NDAQ: MSFT), who both have their own online ad platforms that many online retailers use to advertise their services in an increasingly competitive market.

"What’s spearheading online retail sales growth is a tale of two shoppers that visit the web for very different reasons," said Sucharita Mulpuru, Forrester Research principal analyst and lead author of the report. "The casual shopper goes online to look for the best price, leveraging the transparency of the Internet to save money. However, more affluent customers appreciate the convenience of shopping online and are not necessarily looking for the best deal. Retailers would be wise to recognize there are significant opportunities within both audiences and should market to them accordingly."

In the end, this is great news for the only positive segment of the retailing market.

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Washington Mutual's (NYSE: WM) dreams came true today after it announced a $7 billion capital infusion from an investment syndicate led by private-equity firm TPG. Unfortunately, shares dropped after the bank then announced a higher-than-expected $1.4 billion preliminary write-off for the first quarter and a move to slash its dividend to shore up capital. In the end, the good news offset the bad and shares gave back their earlier gains.

Washington Mutual, like many other banks, has found itself under substantial pressure amid rising defaults. The firm's loan loss provisions for the first quarter alone will run $3.5 billion with a net write-off expected to come in at around $1.4 billion. So, while the $7 billion in additional liquidity is good news, the bank may yet face substantial capital concerns going forward. That's not to mention the significant dilution that shareholders will experience.

Fortunately, Washtington Mutual has a series of plans in place to improve its financial situation after this latest capital injection. The bank will significantly reduce its leverage once the new capital is in place, which makes it a far less risky institution. Additional, the planned elimination of its wholesale lending and home-loan centers will help it refocus on the much more stable retail banking sector that isn't completely reliant on real estate for success.

In the end, this is good and bad news for shareholders. The additional capital will enable the bank to reduce its exposure to loans and ensure its going concern. However, the additional capital also comes at a cost - share dilution. Overall, the move should be good for the long-term but difficult for the short-term.

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Tobacco companies may face an uphill battle against regulators after new legislation was proposed that would give the U.S. Food and Drug Administration (FDA) authority of tobacco products. The House Energy and Commerce Committee voted 38-12 in favor of the proposal that is now ready to be passed on to the U.S. Senate before becoming effective. Shareholders of tobacco companies are divided as the legislation may benefit some while hurting others.

The new legislation is expected to impose significant restrictions on marketing as well as require larger warning labels. These are developments that are more likely to hurt smaller tobacco companies rather than the nationally-recognized and established brand names. This means that big companies like Philip Morris International (NYSE: PM), which recently spun off from Altria Group (NYSE: MO), stand to benefit at the expense of other smaller players like Carolina Group (NYSE: CG) and Reynolds American (NYSE: RAI).

This may sound great for larger companies, but there is a big downside. The FDA will also likely require manufacturers and importers of tobacco to pay user fees to fund the new regulatory responsibilities under the bill. These fees are expected to net $90 million this year, but increase to $755 million by 2018. These fees would be assessed based on market share, which means that the lion's share of the fees will be levied on companies like Philip Morris.

The best options for shareholders may be those tobacco companies with greater international exposure. Companies like Imperial Tobacco Group (NYSE: ITY) with particular strengths in the United Kingdom, Germany, The Netherlands, Belgium, the Republic of Ireland, France, Spain, Greece, Poland, Ukraine, Russia, Australia, Taiwan and sub-Saharan Africa are of particular interest. Strong international brands may become more important than strong domestic brands if the measures pass.

In the end, tobacco companies are likely to suffer from these new measures. Reduced marketing will put pressure on top-line growth by limiting their ability to attract new customers. Meanwhile, the fees associated with the new regulation will put pressure on margins and negatively impact the bottom-line. Combined, this is bad news for tobacco companies if the bill is passed in its current state.

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Bassett Furniture Industries Inc. (NDAQ: BSET) management was caught sitting around on the job, according to at least one activist hedge fund. Costa Brava, which owns just over five percent of the company, recently expressed its disappointment with the furniture business and initiated a proxy contest in order to install its own board members to enforce change. So, should shareholders support these new board candidates?

Costa Brava believes that the board of directors should put a plan in place to reduce the capital needs of Bassett's furniture business and to maximize the value of Bassett's investment and real estate assets. The hedge fund argues that the furniture business has been contracting for several years as Asian imports have severely undercut domestic pricing. Meanwhile, the housing market turmoil has reduced fundamental demand for furniture.

The real value in Bassett is apparent in its balance sheet. Perhaps the most interesting highlight is Bassett's 47% ownership stake in a 3 million square foot exhibition space in High Point, NC. Net operating income from this property are around $30 million, which (capped at 10%) carry an implied valuation of $300 million. Subtracting the $105 million in debt yields $195 million in equity, which means Bassett's stake is worth around $91 million.

Bassett also has cash and investments of over $80 million, hedge fund investments of $51 million, marketable securities of $25 million, and a profitable International Home Furnishings Center (IHFC) division. The IHFC and hedge funds have been subsidizing the furniture business for years. In fact, the "core" furniture business hasn't been able to generate a stable cash flow for nearly 10 years with over $85 million being wasted since 2001.

Costa Brava recommended that Bassett focus on the value in these less risky assets and scale back or eliminate its risky and unprofitable furniture business. The hedge fund's board nominees have vast experience in many different businesses, including real estate and hedge funds. Costa Brava insists that substantial value can be unlocked by monetizing these assets and returning the cash to shareholders.

Bassett responded Monday by issuing a special dividend for shareholders while recanting its prior dedication to unlocking value through its past dividend hikes. However, many believe that these measures may be too little too late. The special dividend was only $1.25 per share and the dividend hike was only 12%. The reality is that these numbers pale in comparison to the amount of value that could be unlocked by the hedge fund.

In the end, this is all great news for shareholders who stand to benefit from such measures to unlock value. It will be interesting to see just how much support Costa Brava receives from shareholders. Combined, these factors make BSET a stock worth watching closely into the April 18th annual meeting!

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Motorola Inc. (NYSE: MOT) will be calling upon two of Carl Icahn's nominees for election to its board as part of a truce with the activist shareholder. Let's just hope their using Motorola phones: The cellphone-maker's shares have fallen nearly 50% over the past year thanks slowing sales. The decline prompted Mr. Icahn to recommend a spin-off of the company's Mobile Devices unit in order to unlock value and enhance both businesses.

"We are pleased to have reached this agreement with Carl Icahn," said Greg Brown, president and chief executive officer. "We look forward to continuing the process we announced on March 26 to create two independent publicly-traded companies and we are pleased to avoid a costly and distracting proxy contest."

Carl Icahn lost a proxy contest last year, but management's failures in 2007 increased the odds this time around. Management fought briefly with the activist, but ended up implementing his plan for a spin-off of the Mobile Devices unit. However, the activist was still concerned with the speed and manner in which a new management team is selected for the mobile division. As a result, he insisted that his own directors be elected to the board to oversee the process.

Motorola finally agreed today and the two announced a truce that will enable Icahn to implement his activist agenda while allowing Motorola to avoid an expensive proxy contest. The cell phone maker also agreed to seek input from the activist investor in connection with significant matters regarding the separation of the Mobile Devices business.

"This is a very positive step for Motorola in that shareholder representatives will have strong input into board decisions affecting the future of our company," said Carl Icahn. "In addition, the Motorola Board has also taken an important step forward for corporate governance in that the separated company which includes Mobile Devices will be essentially free from poison pills and staggered boards, both of which, in my opinion, serve to make democracy a travesty in corporate America."

In the end, this is great news for shareholders as they will finally have their own represented on the board. Meanwhile, a successfully spin-off should help both companies focus on their core competencies and improve their bottom-line. This has made MOT a stock worth watching over the next few months!

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Microsoft Corporation (NDAQ: MSFT) is starting to put more pressure on Yahoo Inc.'s (NDAQ: YHOO) board to take action with regards to its $41 billion buyout bid. Microsoft chief Steve Balmer criticized Yahoo's board for its failure to take quick and decisive action and decision to implement costly anti-takeover provisions. Meanwhile, he insisted that the deterioration of the equity markets and decline in internet traffic has made this transaction even more necessary to conclude very quickly. As a result, Microsoft threatened a proxy contest if the board did not work towards a definitive merger agreement within three weeks.

Yahoo replied in what is the lengthiest letter to date regarding the bid. Chief executive Jerry Yang and Chairman Roy Bostock wrote that the current offer is not in the best interests of shareholders, but the company would be open to a bid at a fair price. The two also insisted that the two parties have already held meaningful discussions and that any hiccups were primarily due to Microsoft's hesitation to ask or provide regulatory information on the deal. Finally, Yahoo insisted that the majority of its shareholders still believe that Microsoft's bid substantially undervalues the company.

Here is a copy of both letters in full:

Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Members of the Board:

It has now been more than two months since we made our proposal to acquire Yahoo! at a 62% premium to its closing price on January 31, 2008, the day prior to our announcement. Our goal in making such a generous offer was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy.

While there has been some limited interaction between management of our two companies, there has been no meaningful negotiation to conclude an agreement. We understand that you have been meeting to consider and assess your alternatives, including alternative transactions with others in the industry, but we've seen no indication that you have authorized Yahoo! management to negotiate with Microsoft. This is despite the fact that our proposal is the only alternative put forward that offers your shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers.

During these two months of inactivity, the Internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other Internet-focused companies in particular. At the same time, public indicators suggest that Yahoo!'s search and page view shares have declined. Finally, you have adopted new plans at the company that have made any change of control more costly.

By any fair measure, the large premium we offered in January is even more significant today. We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.

Given these developments, we believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies that will deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers. If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.

It is unfortunate that by choosing not to enter into substantive negotiations with us, you have failed to give due consideration to a transaction that has tremendous benefits for Yahoo!'s shareholders and employees. We think it is critically important not to let this window of opportunity pass.

Sincerely yours

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

Dear Steve:

Our Board has reviewed your most recent letter with regard to the unsolicited proposal you made to acquire Yahoo! on January 31, 2008.

Our Board carefully considered your unsolicited proposal, unanimously concluded that it was not in the best interests of Yahoo! and our stockholders, and rejected it publicly on February 11, 2008. Our Board cited Yahoo!'s global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as its substantial unconsolidated investments, as factors in its decision.

At the same time, we have continued to make clear that we are not opposed to a transaction with Microsoft if it is in the best interests of our stockholders. Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo!, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders.

Since disclosing our Board's position with respect to your proposal, we have presented our three-year financial and strategic plan to our stockholders, which supports our Board's determination that your unsolicited proposal substantially undervalues Yahoo!. Those meetings with our stockholders have also provided us an opportunity to hear their views.

We have continued to launch new products and to take actions which leverage our scale, technology, people and platforms as we execute on the strategy we publicly articulated. Today, in fact, we are announcing AMP! from Yahoo!, a new advertising management platform designed to dramatically simplify the process of buying and selling ads online.

Finally, our Board has been actively and expeditiously exploring our strategic alternatives to maximize stockholder value, a process which is ongoing. All of these actions have been driven by our overarching commitment to maximize stockholder value.

Our Board's view of your proposal has not changed. We continue to believe that your proposal is not in the best interests of Yahoo! and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo!. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal.

In contrast to your assertions about the effect of general economic conditions on our business, Yahoo!'s business forecasts are consistent with what we outlined in our last earnings call. As you know, we recently reaffirmed our Q1 and full year guidance, which is a testament to our ability to perform in line with our expectations despite the current economic environment. In addition, our three-year financial and strategic plan which we have made public demonstrates significant potential upside not previously communicated to the financial markets. This plan has received positive feedback from our stockholders, further strengthening the view that Yahoo! is worth well more as a standalone company than the value offered in your proposal, and would be even more valuable to Microsoft. Your own statements have made clear the strategic importance of Yahoo!'s substantial assets and capabilities to Microsoft.

We regret to say that your letter mischaracterizes the nature of our discussions with you. We have had constructive conversations together regarding a variety of topics, including integration and regulatory issues. Your comment that we have refused to enter into negotiations to conclude an agreement are particularly curious given we have already rejected your initial proposal, nominally $31 per share at the time, for substantially undervaluing Yahoo! and your suggestions in your letter and the media that you are considering lowering the value of your proposal. Moreover, Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit.

As to antitrust, we have discussed with you our concerns. Any transaction between us would result in a thorough regulatory review in multiple jurisdictions. As a follow up to a recent meeting among our respective legal advisors we had on this topic, and at your request, we provided to you on March 28 a list of additional information we would need to further our understanding of the regulatory issues associated with any transaction. To date, you have still not provided any of the requested information.

We consider your threat to commence an unsolicited offer and proxy contest to displace our independent Board members to be counterproductive and inconsistent with your stated objective of a friendly transaction. We are confident that our stockholders understand that our independent Board is best positioned to objectively and knowledgeably evaluate our Company's alternatives and to maximize value.

In conclusion, please allow us to restate our position, so there can be no confusion. We are open to all alternatives that maximize stockholder value. To be clear, this includes a transaction with Microsoft if it represents a price that fully recognizes the value of Yahoo! on a standalone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing. Lastly, we are steadfast in our commitment to choosing a path that maximizes stockholder value and we will not allow you or anyone else to acquire the company for anything less than its full value.

Yours very truly,

Jerry Yang

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Select Comfort Corporation (NDAQ: SCSS) shares may be well off of their $19/share 52-week highs, but at several professional investors are giving this stock a second look. The depressed levels have led to several analyst upgrades as well as at least one activist hedge fund that has taken a positive stance. The Clinton Group not only commended management, but also increased its stake to 6.1% in recent days.

The Clinton Group previously expressed disappointment with Select Comfort in a series of letters, but is now convinced that the company is moving in the right direction. The activist hedge fund met with Chairman Ervin Shames and CEO William McLaughlin regarding the prospects and strategy of the company and liked what they saw. In particular, the two executives told the hedge fund that the company was improving operating practices by focusing on driving sales through new marketing strategies and implementing appropriate cost reductions where necessary.

The two parties also discussed implementing changes that the Clinton Group proposed during their last letter to the board, which included:

1. Revise marketing strategy to refocus on direct marketing.
2. Disband the "Quality of Life Advisory Board" as a wasteful use of company resources.
3. Review its store portfolio to eliminate underperforming stores.
4. Immediately cease all new store openings and spending on unnecessary capital expenditures until sales results improve.
5. Eliminate stores in regions where the Company does not have the critical mass to justify its advertising and the overhead for that region, and then eliminate the excess regional and corporate overhead.
6. Freeze spending on the SAP system installation until it is evaluated by an independent consultant.
7. Consider subleasing or disposing of the costly new corporate headquarters and conduct a study on the future needs of the Company in light of its anticipated growth.
8. Revise new Chief Executive Officer performance metrics to earn 2008 base salary to align with shareholders interests.
9. Consider outsourcing its call center operations.

It is clear that Select Comfort has been experiencing difficulty due to a weak macroeconomic environment, but the Clinton Group now believes management and the board is now cognizant of its previous missteps and focused on improving the company's performance in 2008 and beyond. Even assuming a difficult environment for consumer spending, the company is trading at historically low multiples and at a valuation discount to its comparable peers.

The Clinton Group believes that this valuation gap between Select Comfort and its peers will close as its new initiatives begin to bear fruit and the company will soon return to historical levels of profitability and valuation. As a result, their conviction is stronger than ever that the company has exceptional long-term growth prospects. In fact, they even recently purchased 461,244 more shares in a vote of confidence.

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Apple Inc. (NDAQ: AAPL) has reportedly surpassed Wal-Mart Stores Inc. (NYSE: WMT) to become America's largest music store by sales.

According to market research firm NPD Group, Apple's iTunes digital store sold more albums in the first two months of this year than any other music retailer. Though consumers still buy more physical music in the form of CDs than the digital song files that iTunes sells, iTunes has been able to vault ahead of Wal-Mart because it dominates the music download market – even though the music download pie is smaller, iTunes has such a big slice that it has overtaken all individual CD sellers.

This announcement is not so much immediately important for Apple's or Wal-Mart's profitability as it is symbolic – the fact that the biggest music retailer doesn't sell CDs or have physical stores signifies the transformation the music industry has undergone in the past decade.

Port Washington, NY based NPD Group computed the figures by counting every 12 individual songs sold as one album, which is absolutely key to the claim that iTunes sold more albums than any other retailer because in reality few iTunes customers purchase complete albums.

In the long-run, this news is much more significant for Apple than Wal-Mart because Apple's results are far more dependent on iTunes and its complimentary digital music players, iPods, than Wal-Mart's results are dependent on CD sales. Though Apple doesn't release specific results for iTunes – probably part of a strategy to prevent music companies from complaining about its profitability – if downloading music is now officially the standard, Apple could not be in a better position to capitalize on it.

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Honeywell International Inc. (NYSE: HON) announced an agreement to purchase personal protective equipment manufacturer Norcross Safety Products LLC for $1.2 billion from Odyssey Investment Partners.

Honeywell is the world's largest manufacturer of cockpit displays but also provides products ranging from security technologies for buildings to specialty chemicals. Last year, the company had net income of $2.4 billion on revenue of nearly $35 billion.

Norcross makes safety equipment for "the fire service, utility and general industrial worker segments" and had approximately $609 million in revenue last year according to the press release on the deal.

"With more than 100 years of industry experience, best-in-class solutions and trusted brands, and a strong management team with exceptional talent and depth, Norcross is a globally recognized industry leader that will bolster our offerings to our customers in key Life Safety segments," Honeywell CEO Roger Fradin said.

President of Honeywell Life Safety Mark Levy highlighted the logic of the deal, "This acquisition creates an exciting adjacency for Honeywell Life Safety -- especially our Fire Systems and Gas Detection businesses, which share common distribution channels with Norcross. We expect strong sales synergies across Honeywell businesses and opportunities to add value to Norcross products with Honeywell electronic gas sensors, fire detection and advanced fiber material technologies."

The obvious question, given that Norcross seems an excellent fit, is did Honeywell pay a good price for the company? Norcross is currently held primarily by Odyssey Investment Partners, a private equity firm, which frankly means almost no material financial data for Norcross is publicly available to analyze. Private equity firms can invest in companies traded on stock exchanges – which means they have to file legally required financial documents – but often instead purchase equity stakes in private companies or take public companies private.

This strategy allows private equity firms to be freed from answering to Boards of Directors and company shareholders in the management decisions of companies they own but it also makes private equity firm performance, and the performance of their respective companies, very difficult to track. Honeywell certainly had access to Norcross' financial data while formulating this deal, but for now all that can be said for certain is the synergies of the purchase are obvious but the fairness of the price is not.

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Airlines are struggling to get any lift amid record oil prices and a weakening economy. ATA Airlines and Aloha Airlines both shut down operations and filed for bankruptcy this week alone while larger carriers like Northwest Airlines (NYSE: NWA) are raising prices and cutting routes to stay alive. In fact, the only airline eking out a profit seems to be Southwest Airlines (NYSE: LUV).

Southwest Airlines revealed $111 million in net income during the fourth quarter after it was able to lock in lower fuel prices using derivative hedges. These contracts enable companies to pay a small fee in order to lock in prices for fuel years later. As a result, the airline was able to save over $300 million in fuel costs and post a 95 percent increase in net income. Just how long Southwest can protect its 67 quarters of consecutive profit, however, will surely be tested in the coming year amid soaring expenses.

Many other airlines haven't been so lucky in facing these rising costs. Those that were in bankruptcy a few years ago did not have the financial flexibility to make the fuel hedges that Southwest made and are now completely exposed. As a result, many airlines are being forced to take other actions to raise revenues and cut expenses. Analysts remain concerned, however, that these could revive the industry's past trouble.

Northwest Airlines announced that it would raise its fairs, fuel surcharges and baggage fees and cut its domestic flight schedule by 5 percent in order to help its bottom line. The airline also said it had suspended plans to hire more pilots and flight attendants while cutting capital spending that doesn't involve airlines by $100 million this year. Meanwhile, fuel prices are now seen as being $1.7 billion higher than it projected in May when it exited bankruptcy, which could put the company back at risk.

Other airlines have also taken similar actions. UAL Corporation's (NYSE: UAUA) United Airlines announced that it will begin charging fliers that wish to take a second piece of luggage beginning in May. Delta Airlines (NYSE: DAL) is also imposing new or higher fees on many travelers including frequent fliers, passengers traveling with pets and people booking their ticket over the phone.

All of the problems can also be traced back to soaring fuel expenses. Delta saw its fuel bill jump 28 percent to $1.36 billion during the third quarter while United Airlines saw a 43 percent jump. Oil prices have reached speculative highs after OPEC promised that it would not raise production levels for the remainder of the year. Meanwhile, the declining dollar has also contributed to the speculation since all commodities are now more expensive.

In the end, the airlines are now in the "perfect storm" of problems with declining consumer spending and quickly rising expenses. Even the best airline in the industry is seen as at risk of losing its profitability. These problems may not disappear until the slowdown in the U.S. economy is over and that could take awhile. Whether or not these airlines will survive that time remains to be seen.

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Dillard's Inc. (NYSE: DDS) announced an agreement with many of its dissident shareholders in a move designed to avoid an expensive proxy contest. Activist hedge funds Barington Capital and the Clinton Group agreed to forgo a proxy contest in exchange for the voluntary nomination of four of its proposed directors. Additionally, the board agreed to review whether the company's real estate assets and capital are being optimally deployed to build shareholder value.

"We are pleased to have reached an agreement with Barington and Clinton," Chairman and CEO William Dillard. "Both the Board and management welcome the perspectives and insights of our proposed new directors. The Class B board members are committed to working with the new Class A board members to ensure that the best operating plan and management team possible are in place."

Specifically, Dillard's agreed to close under-performing stores in order to rationalize real estate as soon as possible, cut unnecessary costs, and subject all future commitments for new stores to strict return on capital requirements that will be set by the board and management. These measures will help the company improve its bottom-line by reducing unnecessary expenses while ensuring that its assets are being monetized to drive profitability.

The activists' nominees will be designated Class A directors and have a term that will explore at the 2009 annual meeting. Under the agreement, they will have all the same rights and abilities and the original Class B directors while focusing on ways to implement the activist agenda. This agenda consists of three tremendous opportunities for improvement:

1. Dillard’s $7.5 billion revenue base offers significant margin leverage capable of producing sizable cash flow gains from any future operating improvements. The Company’s geographic concentration, especially in high-growth areas of the Southeast and Southwest United States, offers unique regional opportunities for its 331-store portfolio. Furthermore, the Dillard’s brand name is well-regarded in the department store sector and the Company has received above average scores in the area of customer loyalty according to a recently released survey by Brand Keys. Clearly, Dillard’s has the scale and brand recognition to be a successful retailer.
2. As Dillard’s trailing twelve month operating free cash flow margin is 2.4% versus 7.7% for its department store peer group, we believe that stockholders can realize enormous upside if margins can be improved to the levels achieved by the Company’s peers. We see a number of opportunities to immediately reduce the Company’s cost base, including by improving sourcing, rationalizing SG&A expenses and lowering capital expenditures. We also believe that there are a host of initiatives in inventory management and merchandising that can drive customer traffic and enhance margins. Among other things, we believe that Dillard’s needs to tighten its current assortment of offerings and vendors and consider a more regular promotional cadence, as its stores, in our opinion, are over-inventoried. In addition, we believe that Dillard’s needs to embark upon an aggressive re-merchandising effort that features new vendors (including exclusive offerings) and updated private label and in-house collections to differentiate its value proposition for customers. Furthermore, it is our belief that the Company needs to enhance its brand marketing by adding more image and lifestyle campaigns that communicate a revitalized message to the marketplace. We are convinced that each of these initiatives would add excitement and newness to the Dillard’s shopping experience and attract customers to its stores.
3. Dillard’s owns approximately 75% of its store portfolio, comprised of approximately 42 million square feet of retail real estate. Currently, the Company’s shares trade at only 0.5x its tangible book value of approximately $32.50 per share. This represents a significant discount to the Company’s peer group, which trades at an average tangible book value multiple of approximately 2.0x. We also believe that Dillard’s tangible book value is understated, since the current market value of the Company’s owned real estate far exceeds its depreciated book value. In fact, in a November 26, 2007 research report, Deutsche Bank estimated Dillard’s net asset value before taxes to be $59 per share. Deutsche Bank also notes that “actions taken to unlock the Company’s real estate value would be positive for the shares, as the NAV [net asset value] for Dillard’s [is] greater than the value based solely on operating fundamentals.” It is our belief that there are a number of measures that the Company can take to enhance the value of its real estate portfolio, including converting certain properties to higher and better use, closing underperforming stores and engaging in sale/leaseback transactions.

These proposals have a lot of merit and would unlock substantial value if implemented. The fact that the activist investors will now hold seats on the board of directors significantly increases the likelihood of change. This makes DDS a stock worth watching closely over the next few months.

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Google Inc. (NDAQ: GOOG) has announced it will sell a branch of recently acquired DoubleClick called Performics – a marketing firm that helps websites increase their ranking on search engines.

Facing an obvious question about conflict of interest – because Performics tries to increase rankings most prominently on Google's own search engine – the decision should help silence at least some possible concerns. Performics is a small wing of DoubleClick, which Google finalized purchasing three weeks ago for $3.2 billion.

Facing prickly questions about possible conflicts of interest, Google Inc. will sell a recently acquired service called Performics that helps Web sites improve their ranking on online search engines, including Google's.

"It's clear to us that we do not want to be in the search engine marketing business," said Tom Phillips, who oversaw the DoubleClick purchase, wrote in a Google blog. "Maintaining objectivity in both search and advertising is paramount to Google's mission."

The decision, announced Wednesday, comes three weeks after Google picked up Performics as part of the online search leader's $3.2 billion purchase of online ad service DoubleClick. Performics has about 200 of DoubleClick's 1,500 total staff.

In other housecleaning measures, Google is also planning to layoff 300 employees, according to much cited unnamed sources, These employees are presumably redundancies created from the DoubleClick deal – this would be the biggest loss of employees in the company's 10 year history. These layoffs are not unexpected as CEO Eric Schmidt acknowledged their possibility in documents published at the close of the DoubleClick deal.

Given Google's exponential growth – it now has more than 18,000 employees – a loss of 300 jobs is not materially significant, but it does perhaps signal the end of the company's era of unfettered financial and hiring growth. Such 'cutting of the fat' is seen by many analysts as online advertising, which drives Google's profits, comes to plateau for the foreseeable future. Google's stock has lost about a third of its value this year.

Hopefully these decisions signal a conscious and thorough effort by Google to improve its bottom-line by carefully examining all its businesses rather than relying solely on ad revenue growth.

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SMTC Corporation (NDAQ: SMTX) is barking up the wrong tree according to one major activist investor. Red Oak Partners voiced its concerns with the company's chronic under-performance in relation to its peers. In fact, the electronics manufacturer is the only company in its peer group that has grown neither revenues nor EBITDA during the past three and four year periods. The only thing the company does beat out all of its peers on is executive compensation! Many shareholders feel that these problems require new blood to fix and are demanding change.

Red Oak sent a letter to the board making several recommendations. First, the hedge fund demanded that the company remove shareholder-unfriendly provisions from its bylaws. These provisions may have been necessary in the past, when the company was struggling to raise money, to fend off vultures but they are now outdated. These provisions include staggered board elections and limits on the number of board candidates that can be proposed. The removal of these provisions would allow shareholders to more easily make their voice heard.

Red Oak's second demand was to add a board member and consultant with experience in building and selling manufacturing and assembly businesses. The goal behind this move would be to maximize shareholder value through a sale of the company at some point in the future. With $250 million in revenues and just $12 million in EBITDA, there are huge cost savings that could be obtained through a buyout. These cost savings could be passed on to shareholders through a higher buyout price. To this end, the hedge fund nominated Rich Effress, who has the necessary experience.

The final recommendation made by Red Oak is a change in the compensation committee to ensure objectivity, independence and performance. The compensation at this company is the highest among its peers while its performance has been the lowest - clearly there is a disconnect. The compensation for board members is also too higher, reaching $370,000 in 2006 for only five individuals. This is nearly double that of other companies with its profitability and value. And finally, they recommended a switch from restricted stock to stock options in order to better align management with shareholders.

"As the largest shareholder - by a wide margin - we ask that our recommendations be heard and strongly considered in the best interests of all shareholders and not just for us," said David Sandberg of Red Oak Partners. "We think it is important to begin a meaningful dialog as to the most effective way to enhance shareholder value and address the concerns and recommendations listed above."

Shares moved up over 6 percent on the news Thursday.

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Spanish Broadcasting System (NDAQ: SBSA) is under pressure from at least one activist shareholder disappointed with the company's performance. Discovery Group demanded a list of shareholders today in an effort to put pressure on the board to act by encouraging them to withhold their votes. The activist hedge fund also aims to draw awareness to its campaign to unlock value in a company whose shares have dropped from $20 in 1999 to under $2 now.

Discovery Group sent a letter to the board about a month ago demanding that it form a special committee to explore strategic alternatives, including a going-private transaction, sale to a strategic party, or at least the adoption of modern corporate governance practices. Current management has failed to build value internally by spending money on acquisitions that provide no incremental value and failing to growth operating income at all.

Spanish Broadcasting holds many properties that would be of great interest to an acquiring party. The company enjoys a market leadership position, operating in highly attractive geographic markets and is situated in the most promising media genre. However, CEO Alacron has refused to entertain any offers that would involve him relinquishing control of the company. This includes offers that have already been made at a substantial premium to today's price.

Discovery Group validated these claims with an anecdote in their February letter:

"We now know this claim to be justified because we have direct knowledge of an important public media company (“XYZ”) that is interested in a potential transaction that could yield a substantial premium to the current SBSA stock price, yet Mr. Alarcon refuses to engage in an evaluation of this opportunity. During a meeting with Mr. Alarcon in December 2007 members of our firm presented the rationale for a combination with XYZ, to which SBSA would bring great strategic value and substantial, immediate cost synergies. Mr. Alarcon concurred with the analysis and suggested that we get the reaction of XYZ’s management to the idea.

"Our team met in January 2008 with XYZ’s Chairman/Chief Executive Officer and its Chief Financial Officer. We communicated to Mr. Alarcon that the XYZ officials were very enthused about the possible combination and wish to engage in a further dialogue directly with Mr. Alarcon. Mr. Alarcon is also in possession of detailed materials prepared by Discovery that outline a proposed structure for this transaction which yields a premium in excess of 100% to SBSA shareholders.

"Suddenly and without explanation, Mr. Alarcon refuses to discuss this opportunity. While Mr. Alarcon’s change in posture is consistent with his industry reputation, it is surprising nonetheless. Mr. Alarcon’s resistance in this case cannot be attributed to valuation because the proposed structure gives him the option to either remain invested or liquidate his shares. Rather, it appears that Mr. Alarcon fears a loss of control. That fear is interfering with Mr. Alarcon’s ability to act in the interest of all shareholders."

It is clear that there is a lot of value that can be unlocked if Discovery Group can successfully pressure Spanish Broadcasting into at least entertaining such offers. Moreover, a simple move to modernize governance practices would enable shareholders to more forcefully make demands designed to maximize value. In the end, this is a valuable company being held back by a poor management team, but Discovery Group aims to change all that.

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Circuit City's (NYSE: CC) turnaround plan has been "disastrous" according to one activist shareholder. Mark Wattles criticized the board for focusing too much on cost-cutting and ignoring its impact on profits and revenues. And it's not hard to see the result: The electronics retailer reported a profit of $140 million in fiscal 2006 that quickly dropped to a loss of more than $8 million in 2007.

Management has blamed the decline on outside factors, such as the economy and increased competition from mass merchants. These factors may have affected performance, but firm's like Best Buy (NYSE: BBY) have prospered none-the-less. In fact, Circuit City's largest competitor announced yet another year of double-digit revenue growth while still beating analyst expectations on earnings per share.

Wattles believes that the right senior management team with the right strategy and focus would be able to immediately and dramatically improve Circuit City's profitability. As a result, the activist nominated his own candidates to replace the existing directors on the board. These nominees would conduct a comprehensive review of the retailer's strategy, operations and senior management in order to formulate and implement a plan to maximize value.

In particular, Wattles proposed a series of immediate changes the new directors would make:

1. Replace the current Chairman and CEO with a seasoned executive capable of restoring credibility with employees, vendors and stockholders;
2. Focus on the "customer experience" and strategies for making the current stores more productive;
3. Begin addressing the actual issues facing the Company and drive revenue growth, rather than focusing on cost-cutting strategies and "spin" campaigns.
4. Focus on the most immediate and least capital-intensive opportunities to improve the health of the business; and
5. Develop and articulate a deliverable promise for the new "The City" brand that works within the realities of the current store footprints.
   

Wattles also suggested that Circuit City not summarily dismiss any legitimate, third party interest in acquiring the company. The electronics retailer did exactly that on two occasions during the past five years, including the rejection of a $17 per share bid in February 2005. The activist demanded that the company immediately hire an investment banker to explore strategic alternatives if they receive an expression of interest.

In the end, Circuit City is a strong company with a national brand, strong cash position, minimal debt, and access to a newly-expanded line of credit. Wattles insists that the current senior management is not leveraging these assets to build value, but rather destroying it by focusing only cost-cutting measures. The existing board has lost credibility with shareholders and many believe new blood is exactly what is needed.

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Across the board, automakers announced that U.S. sales dropped severely in the month of March in the face of record high gas prices and concerns about economic stability.

General Motors Corp. (NYSE: GM) had sales drop by a staggering 19%, while both Toyota Motor Corp. (NYSE: TM) and Ford Motor Co. (NYSE: F) had sales drop more than 10% respectively. Not to be left-out, Honda Motor Co. (NYSE: HMC) and Nissan Motor Co. also experiences declines, though much less severe.

This is certainly not totally unexpected – this is the 10th sales drop out of the last 12 month for U.S. auto sales, but what makes it surprising is just how large the drop was across even foreign carmakers.

Ford Vice President Jim Farley said, “I'd like to be able to tell you the worst is behind us but I can't really say that. The second quarter may be the worst sales period of the year.”

Though U.S. automakers weren’t alone in experiencing the sales decline, their share of the overall U.S. market is still decreasing compared to foreign makers. It is now estimated that U.S. companies have 48.4% of the U.S. market compared to 44.5% of the market for Asian companies. This balance will most likely continue to shift as more cars were sold than trucks last month for the first time since May last year – foreign companies tend to do much better in car sales than truck sales. This reversal reflects a renewed customer focus on fuel efficiency in the face of rising gas prices. Not only is this bad news for U.S. market share, it is also very bad news for profitability because trucks and SUVs are drivers of domestic carmakers’ profits.

“Market demand is more sedan-weighted, more to small cars,” because high gas prices force “people [to] rethink their vehicle choice and consider more efficient types Nissan North American VP Al Castignetti said.

Despite this positive trend for Asian manufacturers that tend to have more fuel efficient models, Toyota, Honda and Nissan are still experiencing sales declines. “We’re not immune to economic cycles and downturns in the automotive industry,” said Toyota’s brand division head Robert Carter. “We hope to sustain sales somewhere around the same level as last year.”

In this economy, when the world’s best positioned car manufacturer can only hope to sustain sales, investors should be wary of automaker stocks.

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Best Buy (NYSE: BBY) reported better-than-expected earnings today and helped boost the larger retail sector. The electronics retailer announced its 10th consecutive year of double-digit revenue growth with an 11 percent despite a 3.4% decline in profits. The numbers beat analyst estimates, sending BBY shares higher, and boosted confidence in consumer spending going forward.

Best Buy accomplished its revenue growth by opening 137 new stores last year while increasing annual comparable store sales by 2.9 percent. Profit margins were boosted by a 25 percent growth in online revenue along with more efficient promotional costs, but these gains were more than offset by higher revenue growth from lower-margin products. These products include notebook computers, gaming consoles and international stores.

Many investors were concerned that consumer spending would slowdown given the lack of credit and decline in the housing markets. However, Best Buy's results a shift to low-margin "staple electronics" rather than a larger slowdown. This trend towards in-line revenues on tighter profit margins is a clear theme within the retail sector but has many bullish on the retail sector since it's not so much a slowdown than a temporary shift.

Best Buy also took action to unlock shareholder value by buying back approximately 16 percent of its outstanding shares in an accelerated share repurchase program. The electronics retailer has a remaining authorization of $2.5 billion for the repurchase of its stock with no stated expiration date. Best Buy also paid a dividend of $0.30 per share, which was a 30 percent increase compared to the prior year's fourth quarter.

The current economic decline has many investors clamoring for these types of actions. This is especially true given the cheap multiples in sectors like retail. Share repurchasing helps reduce the number of outstanding shares, which increases earnings-per-share and tends to make price corrections more rapid. This is good news for shareholders as it could help the stock price recover much more quickly when the economy turns.

Interestingly, Best Buy also announced that it holds troubled auction-rate securities. These are AAA/Aaa-rated bonds collateralized by student loans guaranteed 95 percent to 100 percent by the U.S. government. Unfortunately, the market for these securities collapsed in recent times, which made them virtually impossible to sell on the open market without taking a substantial loss.

Normally, companies are required to write-down the value of these securities to this new value, but Best Buy reclassified the investments as non-core, which allowed them to forego that requirement. The reality is that these auction-rate securities haven't really declined in value, but Best Buy may be required to hold onto them for longer than initially expected since they can't sell in an illiquid market.

In the end, this is good news for Best Buy as well as the retail sector and economy. Consumer spending is not slowing as much as many expected and things should begin to improve this coming year. Combined, these factors make BBY a stock worth watching closely over the next few months.

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Packeteer, Inc. (NDAQ: PKTR) shareholders aren't quite ready to pack their bags as the stock soared past a $5.50/share buyout offer. The networking software company rejected the $5.50/share offer from Elliott Associates and installed a poison pill in the form of a shareholder rights plan. The move comes after Elliott took its bid hostile by making a tender offer directly to shareholders in an attempt to gain majority control.

The Packeteer board wasn't about to give up that easily. The company adopted a shareholder rights plan with a one year duration whereby any person or group that acquires 15% or more of Packeteer common stock without prior board approval would face a triggering event that would cause significant dilution in their voting power via a rights offering to shareholders. This would make it prohibitively expensive to takeover without approval.

The Packeteer board also confirmed that it was exploring strategic alternatives to maximize value for shareholders, which could include a business combination with third parties or with Elliott, remaining independent, or other strategic or financial alternatives that could deliver higher shareholder value than the current Elliott tender offer. This statement is what caused the run-up in shares seen on Wednesday.

Packeteer also noted in its Schedule 14D-9 filing that it has received indications of interest from, and conducted discussions with, at least five other potential strategic acquirors. One of these companies even submitted a non-binding proposal for an all cash acquisition with a valuation higher than both the Elliott offer and other offers on the table. Furthermore, at least three others also submitted non-binding documents outlining possible transactions.

Even if a sale transaction doesn't take place, the board believes that the company's stand-alone operations will produce significantly greater value for shareholders than Elliott's offer. After all, these strategic and financial buyers are interested in the company because of its products, technologies, and ability to generate revenues and earnings. Traditionally, the company has not made estimates, but it released some bullish ones in its proxy.

Packeteer said in its proxy filing that it anticipates earnings per share to be $0.39 in fiscal 2008. The price-earnings multiple on the March 4th share price (the day prior to the takeover proposal) was 20.3x. Given that this was based on the publicly available estimate of $0.19, the new $0.39 number yields a theoretical value of $7.93 per share. Clearly, the expected benefit of the company's 2008 operating plan has not been fully realized in the offer or current stock price.

In the end, Wednesday was a great day for Packeteer shareholders. The company guided earnings much higher than anyone expected while it also revealed that up to six parties were interested in launching a takeover bid for the company. One offer is already on the table while at least one offer is already substantially higher and in the advanced stages of negotiation. Combined, these factors make PKTR a stock worth watching!

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TravelCenters of America's (AMEX: TA) stock is running out of fuel and some investors are calling for the heads of those responsible. The company posted a higher-than-expected loss of $4.68 per share compared to street expectations of a $1.13 loss. Management blamed the increase on tough economic conditions, but the real reason can be traced back through the company's history.

TravelCenters' problems began when it was acquired by Hospitality Properties Trust back in September 2007. Just a few months later, Hospitality Trust spun-off the operating division of TravelCenters while keeping the real estate to lease back to the new entity. Many investors didn't see it, but the problems had already begun. The landlord became the owner of the new entity, which should raise the conflict of interest flag.

According to TravelCenters' S-1/A filing: "We, [TravelCenters], were formed for the benefit of Hospitality Trust and not for our own benefit. Our formation allows Hospitality Trust to acquire and retain ownership of 146 travel centers without adverse tax consequences to Hospitality Trust. Because we were formed to benefit Hospitality Trust, some of our contractual relationships and the terms of our initial business operations may provide more benefits to Hospitality Trust than to us."

This shocking conflict of interest only became increasingly apparent as time progressed. TravelCenters stock began trading at $30 per share and quickly rose to a higher of around $45 before it began its rapid decent. The powerful combination of costly rents, rising expenses, and a failure to build sales of the higher-margin products and services sparked a landslide that culminated with Tuesday's hugely-disappointing earnings announcement, after which TA shares plummeted an additional 42% (in just one day) and closed at just $3.50.

So, what was behind the huge earnings miss? Well, management began taking action to diversify its revenues and turn itself around, and TA acquired a significant competitor, PETRO - but they did it at the wrong time. Part of the process forced them to integrate operations and re-train employees, which resulted in a substantial one-time expenses and increases in labor costs. These cost increases came at a time when revenues were also sharply lower thanks to higher oil prices and lower trucking traffic. Combined, these factors led to a huge loss during the most recent quarter that caught many investors off-guard.

TA's failure to diversity its revenues past low-margin fuel and into high-margin convenience store products has resulted in substantial pressure on its profit margins. Convenience store competitors like The Pantry (NDAQ: PTRY) and Casey's General Stores (NDAQ: CASY) have clearly shown that earnings can be increased with higher-margin convenience stores items if they are upsold for fuel customers. TA's management has yet to make a signficant move to upsell to its customers, which is yet another issue that led to the steady erosion in its financials.

In the end, perhaps the new CEO without relevant experience in trucking and retail along with a dedication to supporting Hospitality Trust should never have been trusted in the first place. Remember, TA was “formed to benefit Hospitality Trust.” It just goes to show how important it is to read the fine print before investing!

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Microsoft Corporation’s (NDAQ: MSFT) pursuit of Yahoo Inc. (NDAQ: YHOO) continues to generate headlines even as new material developments haven’t arisen in the last few weeks.

Today, numerous sources are claiming that despite speculation Microsoft has no plans to increase its $44.6 billion bid for Yahoo – even as Yahoo has attempted to make the case that it is much more valuable.

Microsoft seems to be counting on Yahoo’s lackluster investor presentations combined with a slowing economy to make its offer seem not only fair but unmatchable. Insiders at Microsoft have been quoted saying that they are the only game in town right now so why raise the bid when they are only bidding against themselves. In other words, despite Yahoo’s claims that its businesses are worth more than $44.6 billion, no other suitors have made an equal, yet alone higher, offer, so why should Microsoft increase its bid when shareholders seem interested in a deal?

Though both Time Warner Inc. (NYSE: TWX) and News Corp. (NYSE: NWS) have both been discussed as possible alternatives to Microsoft, not necessarily as purchasers of Yahoo but rather as strategic partners, nothing has come of such talk. In reality, neither company has the resources or desire to match the short-term value of Microsoft’s bid. Instead, the companies were used to try and cause an increase in the price of the existing Microsoft bid.

A legitimate issue to consider in the structure of Microsoft’s bid is that because it is a cash-and-stock offer, the value of the bid is susceptible to a slowing economy or bearish stock market. In fact, since the bid was announced two months ago, the real value of the deal has slipped from $44.6 billion to only about $42 billion. This decline is due to the decline in Microsoft share price.

Unless something significant changes, holding Yahoo shares in the hope that Microsoft will increase its bid or that a rival bidder will emerge is not a good bet.

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National City Corporation (NYSE: NCC) announced Tuesday morning that it is reviewing a range of "strategic alternatives", which is usually street-code for considering a sale of the company. The company offered no additional details, but there has been some speculation that advanced negotiations are already underway. However, large losses sustained in its mortgage banking business may prove to be a sticking point.

Wells Fargo (NYSE: WFC) and Key Corporation are the two companies reportedly in talks with the troubled mortgage banker. However, sources close to the situation say that a deal is unlikely until the buyers become more comfortable with the bank's residential real estate portfolio. The big problem is finding a buyer willing to pay a fair price without months of due diligence.

National City is also looking at other alternatives, including a sale of its asset management business and/or a sale of its stake in Visa. The company already sold a third of its stake in Visa for $450 million, which means the remainder could be worth another $900 million or more. Meanwhile, its asset management business is still doing well and would likely fetch a decent multiple.

National City is under pressure to come up with some cash after experiencing some heavy losses from their residential mortgage portfolio. Analysts have warned that its remaining $6 billion in risky loans may cause a problem if the company does not either raise additional capital or sell the company. The struggling geographic markets that it operates in will also mean a prolonged struggle if nothing is done.

The troubled mortgage banker already sold its subprime origination platform, First Franklin Mortgage, to investment bank Merrill Lynch at the beginning of the year for $1.3 billion. This proved to be a move in the right direction as Merrill Lynch was forced to close up shop just months after making the huge purchase. However, $6 billion in loans were left behind and are still held by National City.

In the end, National City saw losses of over $300 million last quarter and may see the same this quarter if changes aren't made. Many analysts are convinced that the company needs to take major action to raise some cash or it could face a prolonged downward spiral. Whether or not the company can successfully raise cash or sell itself remains to be seen, but this is definitely a story worth following over the next few months.

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CNET Networks (NDAQ: CNET) may have a valuable portfolio of domain names, but many investors just aren't seeing the value. Shares in the company have been trending down for the past three years and investors are ready for change. Recently, activist shareholders put pressure on the company to stop the destruction of shareholder value by making a series of fundamental strategic and operational changes. The question is: Will these changes work?

CNET's shareholder list now reads like a "who's who" of activist hedge funds, including JANA Partners and Sandell Asset Management. These activists released a whitepaper today detailing their disappointment in the company and recommending changes to solve the problems. Altogether, the group controls approximately 14.9 percent of the voting power in the stock, which means they have a significant say.

The whitepaper beings by pointing out the destruction of shareholder value. CNET shares hav declined (21)%, (52)% and (25)% in the one, two and three year periods ended March 28th 2008. This compares to (1)%, 6% and 39% returns for its stated benchmark peer index. Meanwhile, the company has also consistently underperformed numerous peers in profitability and growth, ranking last among these peers in key metrics.

The activist investors then blasted new plans by existing management to reverse coarse and begin creating shareholder value. JANA Partners also rejected CNET's offer of a single board seat today, vowing to continue its proxy battle to gain control of the board. The activists believe that current management has failed to act in the past and lacks the experience and expertise to stop value destruction.

So, what is the new plan for CNET? The activist shareholders proposed that CNET undergo a transition to strengthen its core assets and transition from "Web 1.0" to the modern internet. These efforts would include:

1. Improving CNET's Monetization Infrastructure - The changes to this infrastructure would include improving ad unit optimization and inventory utilization, enhancing the user experience, increasing advertiser ROI, improving navigation, and acquiring additional traffic.
   
   
2. Building a Vertical Ad Network - It is common for large companies like Google, Yahoo, and AOL to create vertical ad networks by syndicating out their sales and technology infrastructure to third party websites. This generates significant increased revenue by allowing a sales force to sell inventory on non-owned partner vertical sites.
   
   
3. Using a Third Party Ad Network to Monetize Unsold Inventory - Revenues and profitability can be significantly enhanced by allowing a third party to monetize unsold or undermonetized inventory. The company has rejected such ideas in the past and only recently agreed to explore it.
   
   
4. Reaccelerating Growth Through Intent-Driven Media Techniques - Internet users today are increasingly intent-driven, meaning they are driven to websites through search engines, social media and web reference links rather than seeking out specific brands. Therefore, syndication and SEO should be areas of focus.
   
   
5. Integration of Social Media and Enhanced Content - The move from "Web 1.0" to "Web 2.0" involves installing social media enhancements to boost growth and enhance the user experience. Social media relies on real user identities, widgets and very sophisticated communications platforms to drive relevant valuable content.
   
   
6. Improve CNET's Technology Platform for Publishing - An improved platform for publishing and managing content could reduce costs and lift efficiency by enabling editors to easily update content and automatically generate related information. More, other improvements could be made to improve SEO.
   
   
7. Bring CNET's Cost Structure In-Line with Peers - CNET is clearly under-earning its customer base when you look at peer revenue per average monthly unique user. And despite having greater scale, the company's margins are still well below that of their peers. Changes should be made to reduce costs and increase revenues.
   

CNET's response to these ideas has been rather negative. The board adopted a poison pill in the form of a shareholder rights agreement as well as several severance packages. Meanwhile, the company offered a meager one board seat to JANA Partners if they dropped the proxy contest. Now investors just have to wait and see if shareholders are more open to the idea of change.

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Lehman Brothers (NYSE: LEH) caused some commotion on the street Monday after issuing $4 billion in preferred stock. The move was intended to quench rumors of a capital shortage, but instead confirmed to many that the bank is facing problems. Meanwhile, existing shareholders aren't too happy about having their stakes diluted by up to five percent. The stock jumped 10 percent this morning, however, after investors digested the news overnight. So, what is the real story?

Short interest in Lehman Brothers has increased five-fold since early 2007 as shares fell more than 40 percent. These short sellers bet that the stock will decline by borrowing and selling shares with the hope that the stock price falls before the borrowed shares have to be purchased and replaced. So far, these investors have made money as fear continues to grip the market and force the financial sector downwards.

Lehman Brothers has vehemently denied rumors of a capital crunch, saying that it has $31 billion in liquid assets along with $65 billion in other assets that it could easily borrow against. However, investors are still a little leary given the rapid demise of rival Bear Stearns (NYSE: BSC) that came as a result of similar rumors. More, Lehman Brothers in many ways has a similar risk profile to Bear Stearns.

Lehman Brothers currently holds $31.8 billion in residential mortgage loans and $13.5 billion in Alt-A loans. So far, the firm has been forced to write down this portfolio by more than $3 billion. However, Lehman insists that the remainder of this portfolio is well-hedged and and future losses will be offset by gains in other areas.

The greater concern is its $31 billion commercial real estate portfolio that continues to face pressure. Many commercial real estate projects, like its Archstone-Smith Trust investment, are falling through amid the poor economic climate. Fewer corporations are expanding while more are laying off significant portions of their workforce. The result is fewer tenants and lower rental prices as a result of consistent supply.

The move upward today comes after foreign markets rallied on the news. This likely spooked short-sellers who then took action to repurchase their shares before the stock rallied. These repurchases combined with existing demand is likely what sent shares soaring higher. How much of the demand for shares was actually driven by confidence as opposed to shorts covering remains to be seen. 

In the end, Lehman Brothers has some significant exposure remaining that could put the firm at risk. However, it looks like its $31 billion in liquid assets should be enough to cover at least for the near term. The fact that it was able to easily raise $4 billion also illustrates confidence by Wall Street. The problem is that it came at the expense of existing shareholders and further spooked the market in general as things still aren't getting better.

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Goldman Sachs Group, Inc. (GS)
The Bear Stearns Companies Inc. (BSC)
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Merrill Lynch & Co., Inc. (MER)