Tuesday, July 31, 2007

Peltz's Trian Fund Prepared To Offer $37-$41 for Wendy's (WEN)

In a 13D filing after the close on Wendy's International (NYSE: WEN), Nelson Peltz's Trian Fund, a 9.8% holder, said they have not been able to reach agreement on several significant provisions of the confidentiality agreement. Triarc said it would be prepared to offer consideration in the range of $37.00 to $41.00 per share to Wendy's shareholders.

A Copy of the Letter:

Dear Jim:
I am writing to you again in my capacities as Chief Executive Officer of TrianFund Management, L.P. and Chairman of Triarc Companies, Inc.

As you undoubtedly know, we have attempted to reach agreement with the Special Committee on the terms of a confidentiality agreement. The confidentiality agreement originally proposed by the Special Committee on June 22, 2007contained several clauses that we objected to because we believed they were not consistent with market practice. We also expressed our concerns that the Special Committee's desire to offer staple financing as part of its sale process and the provisions of the confidentiality agreement relating to the staple financing do not give Triarc the necessary flexibility to improve upon the terms of the staple financing and thereby allow a synergistic buyer such as Triarc to maximize the consideration it could offer to Wendy's shareholders. Despite Triarc's repeated efforts to compromise over the last month, the Special Committee and Triarc have not been able to reach agreement on several significant provisions of the confidentiality agreement.

We believe that Triarc is a natural, strategic buyer for the company and should be encouraged to participate in the sale process the Special Committee is conducting. You should be aware that Triarc presently anticipates that it would be prepared to offer consideration in the range of $37.00 to $41.00 per share to Wendy's shareholders. This represents a premium of 10% to 22% over last Friday's closing price for Wendy's stock and a premium of 15% to 28% over the closing price of Wendy's stock on April 24, 2007, the day before the company announced the formation of the Special Committee. Our indication of value is subject to the completion of satisfactory due diligence, the negotiation of a definitive transaction agreement, clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and Wendy's board and shareholder approval, among other customary conditions. Depending on the results of its due diligence, Triarc may be prepared to increase its valuation. We will send to you under separate cover a form of confidentiality agreement that we are prepared to execute immediately. If the Special Committee recognizes the value to Wendy's shareholders of Triarc's proposed valuation and would like to invite Triarc to participate in the sale process, we suggest that the Special Committee execute that form of confidentiality agreement by no later than 5:00 p.m. on August 1, 2007. If we do not receive a favorable response by then, we will wish the Special Committee well in its effort to conduct an auction that will generate the best transaction for all Wendy's shareholders. We will, however, continue to review and evaluate our alternatives with respect to Wendy's and will continue to contact and discuss with other shareholders our views regarding Wendy's, the conduct of the Special Committee and possible strategies to maximize shareholder value.

I look forward to your response.

Nelson Peltz

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Monday, July 30, 2007

Chapman Capital Discloses 9.9% Stake in Packeteer (PKTR), Demands Sale

In a 13D filing on Packeteer, Inc. (Nasdaq: PKTR), Robert Chapman's Chapman Capital disclosed a 9.9% stake in the company and demanded the company hire an investment bank to maximize shareholder value. Chapman noted that attempt to communicate with top executives was unsuccessful.

From the filing, "On July 30, 2007, Mr. Robert L. Chapman, Jr. attempted to contact the Issuer's Chief Executive Officer, Mr. David G. Cote, to inform him of the Reporting Persons a) having become the owners collectively of 9.9% of the Issuer's Common Stock, and b) demand that the Issuer hire an investment bank to maximize shareholder value. Mr. Cote refused to return Mr. Chapman's telephone call. Subsequently, Mr. Chapman contacted the Issuer's Chief Financial Officer, Mr. David C. Yntema, who refused both a) to record a written message for Mr. Cote regarding Chapman Capital's demand that the Issuer hire an investment bank to maximize shareholder value, and b) to give Mr. Cote a message to that effect. In addition, Mr. Yntema stated that Mr. Cote would not be returning Mr. Chapman's telephone call at any time in the future. Mr. Chapman also contacted the Issuer's Chairman, Mr. Steven J. Campbell, who refused to provide his E-mail address to allow Chapman Capital to provide, unilaterally and thus completely outside the venue of Regulation FD, information to the Issuer's Board of Directors such as that within the forthcoming Original 13D Filing. Following Mr. Chapman's conveyance of Chapman Capital's demand regarding the maximization of shareholder value, the conversation between Mr. Chapman and Mr. Campbell terminated abruptly."

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Chapman Capital Seeks To Replace Vitesse Semi (VTSS) Board

Chapman Capital, a 7.2% holder of Vitesse Semiconductor Corp. (OTC: VTSS), said it has determined to seek nominees to replace all or part of the Board of Director of the company. Chapman said the company last allowed shareholders to elect Board Representatives some 18 months ago, which Chapman said is in clear non-compliance with Delaware law.

Chapman said it expects to file today with the SEC a Schedule DEFN14A initiating the process of soliciting proxies from shareholders of the Company

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Ramius Capital Discloses 6.5% Stake in Luby's (LUB), Urges Review of Strategic Alternatives

In a 13D filing on Luby's, Inc. (NYSE: LUB), Ramius Capital disclosed a 6.5% stake in the company and a letter to Luby's President and Chief Executive Officer and its Board of Directors in which it expressed its belief that the Company is undervalued and urged the Company to engage a strategic advisor to assist Luby's in either executing a sale leaseback on a substantial portion of its owned real estate with a coincident stock buyback and special dividend or pursuing a sale of the Company in a transaction that would recognize full value for the business.

Ramius Partner Jeffrey C. Smith said, "While we applaud the improvement in restaurant operations over the past six years, we believe a significant amount of untapped value resides in Luby's real estate holdings. We strongly urge (the Board) to take prompt action to unlock the inherent value of the Company's real estate holdings to highlight the strong free cash flow generation ability of the Luby's franchise." Smith continued, "The Board should immediately engage a strategic advisor to assist the Company in either a sale leaseback transaction or a sale of the Company."

A Copy of the Letter:

Dear Christopher,

RCG Starboard Advisors, LLC, a subsidiary of Ramius Capital Group, L.L.C.,together with its affiliates, currently own approximately 6.5% of Luby's, Inc.("Luby's" or "the Company"). As the largest independent shareholder of Luby's, we believe that the Company is undervalued and we are concerned that both management and the Board of Directors have not taken appropriate action to unlock the intrinsic value of the Company. While we applaud the improvement in restaurant operations over the past six years, we believe a significant amount of untapped value resides in Luby's real estate holdings. Over the past few months we have made several attempts to meet with you and the rest of Luby's management team to discuss our ideas for enhancing shareholder value, but Company representatives have repeatedly informed us that members of management are too busy to meet with us.

Therein lies one of our chief concerns with Luby's corporate practices. As shareholders of Luby's, we are extremely concerned that the time commitment associated with running the Pappas restaurant entities, which are privately owned by you and your brother Harris, is preventing Luby's management from taking the steps necessary to unlock value at Luby's. While we are sympathetic to the difficulty of managing both businesses, the shareholders of Luby's are not interested in the Pappas restaurant chain. We are interested in Luby's. As a public company, management has a fiduciary responsibility to work with the Board of Directors to maximize value for all shareholders.

With the value of Luby's real estate, potentially exceeding its current enterprise value, we believe value can be maximized in one of two ways: 1)execute a sale leaseback on a substantial portion of the owned real estate with a coincident stock buyback and special dividend or 2) sell the Company for a price that reflects the full value of the Luby's concept and the associated real estate in order to maximize risk adjusted returns for shareholders. Given the available sources of financing, we believe a private equity firm could purchase Luby's at the current market price with little or no equity consideration. Also,when considering the value of the Luby's concept and related cash flow, we believe the business could attract a significant premium in a competitive sale process.

After conversations with several real estate and sale leaseback experts, we believe that Luby's real estate is worth between $206 million and $265 million pre-tax in a sale leaseback transaction. This represents between 91% and 117% of the Company's current enterprise value.


We believe Luby's stock price of $9.66 per share as of July 27th, ascribes little to no value to the Company's real estate. Additionally, the current price does not, in our view, fully value the cash flow or growth strategy of Luby's as is evidenced by the 6.8x multiple of latest twelve months ("LTM") EBITDA.

Upon executing a sale leaseback transaction, we estimate that Luby's will have net cash after taxes of between $208 million and $244 million. We believe that the Company should use between $100 million and $150 million in cash to do a large buyback and pay a substantial one-time dividend. We believe the remaining cash from the sale leaseback transaction and the Company's significant debt capacity should then be used to fund management's recently disclosed restaurant expansion strategy. We believe this strategy will create the most value for shareholders and will leave the Company with sufficient cash to grow. Assuming the Company is able to repurchase shares in a Dutch auction tender offer at a20% premium to the current market price, this buyback would retire approximately33% to 49% of the current shares outstanding.

After completing the sale leaseback transaction, stock buyback, and special one-time dividend, we believe Luby's stock could trade at a valuation more in line with comparable public companies. Based on analyst next twelve months("NTM") consensus EBITDA estimates of $37.9 million, and assuming the Company pays between $17.5 million and $19.9 million of market rent post sale leaseback,Luby's pro-forma NTM EBITDA would be between $20.4 million and $18.0 million. Although we believe there is no justification for the discount currently ascribed to Luby's shares, using a 10% discount on the high end of the comps below and the current NTM EBITDA multiple on the low end, Luby's could trade for between 6.0x and 6.2x NTM EBITDA.


With the execution of the aforementioned changes, our analysis below demonstrates that Luby's shares could be valued in a range of $13.11 per share to $15.57 per share. This represents between a 36% and 61% increase from the current stock price'


While we believe a sale lease back transaction and the distribution of capital can unlock significant shareholder value, the value of the Company's shares could continue to trade below their intrinsic value as long as there is perceived management conflict or distraction. We are concerned that significant potential conflicts of interest and time commitment issues exist for certain members of management and directors of Luby's who are also employed by, or otherwise affiliated with, your Pappas restaurant entities. This does not represent good corporate governance. While you may be able to manage through your conflicts of interest, we believe it is imperative for you to surround yourself with a wholly disinterested Board and management team that can render independent judgment and ensure that any future potential conflicts of interest between Luby's and Pappas restaurants are evaluated with the best interests ofall of the Company's shareholders in mind.

We note below just a few of the current time commitment issues and potential conflicts of interest for certain members of Luby's management team and Board:

o Frank Markantonis, a member of Luby's Board, has served as an attorney for many years for the Pappas restaurant entities and his principal client throughout his legal career has been Pappas Restaurants, Inc.

o Mr. Markantonis' step-son, Peter Tropoli, serves as a Senior Vice President, General Counsel and Secretary for Luby's and has provided legal services to the Pappas restaurant entities.

o Luby's current financial and accounting advisor and former Chief Financial Officer, Ernest Pekmezaris, also serves as the Treasurer of Pappas Restaurants, Inc.

o Additionally, we note that the new Chief Financial Officer, Scott Gray, served as Internal Auditor at Pappas restaurants prior to joining the Company in 2001. It is unclear whether he retains any current conflict.

We firmly believe in the value of Luby's. Management and the Board cannot just accept the current state because of past accomplishments but rather are duty bound to maximize value for shareholders today. We strongly urge you to take prompt action to unlock the inherent value of the Company's real estate holdings to highlight the strong free cash flow generation ability of the Luby's franchise, while improving corporate governance and minimizing conflicts. TheBoard should immediately engage a strategic advisor to assist the Company in either a sale leaseback transaction or a sale of the Company. There is a significant opportunity to unlock value at Luby's. We look forward to working with senior management and the Board to meet that objective.

Best Regards,

Jeffrey C. Smith


Ramius Capital Group

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D.E. Shaw Discloses 5.6% Stake in ENDO Pharmaceuticals (ENDP), Expresses Concerns about Stock Under-performance

In a 13D filing on ENDO Pharmaceuticals Holdings (Nasdaq: ENDP), D.E. Shaw & Co disclosed a 5.6% stake in the company and a letter to CEO Peter Lankau expressing certain concerns with respect to the current share price of the Common Shares.

The firm believes that the true value of the Common Shares is being discounted due to (a) an inefficient capital structure at the Issuer, in the form of net cash on hand retained for a potential strategic acquisition transaction, (b) the Issuer’s publicly stated intention to diversify away from pain management through a strategic acquisition transaction, and (c) the perceived risk of genericization of the Issuer's drug Lidoderm. The firm believes that more effectively deploying the Issuer’s net cash position in the near-term could substantially improve its present and future valuation with no risk of impairing the ability to pursue a future acquisition transaction. The firm believes the company should consider strategic alternatives prior to pursuing a transaction to diversify beyond pain management. The firm also believes that the risk of genericization to Lidoderm's business is overstated.
A Copy of the Letter:
Dear Mr. Lankau:
As you are aware D. E. Shaw Composite Portfolios L.L.C. and certain of its affiliates (collectively “we” or the “D. E. Shaw group”) beneficially own approximately 5.6% of the outstanding shares of Endo Pharmaceuticals Holdings Inc. (“ENDP” or the “Company”).
Over the past several months we have had a constructive dialogue with you and your management team on the Company’s current prospects and longer-term strategic vision. We continue to believe that ENDP’s current portfolio consists of highly valuable products (including Lidoderm, Opana IR and ER, and Frova) that provide the Company with the commercial presence in pain management that is required to be considered “world-class.” In addition, the Company’s cash balance remains a widely misunderstood and undervalued asset. We believe the true fair value of ENDP is being discounted due to 1) inefficient capital structure, 2) publicly stated intention to diversify away from pain management, and 3) the perceived risk of Lidoderm genericization.
Over the last 12 months, ENDP has underperformed relative to the DJIA, NASDAQ, and S&P 500. These indices have appreciated 26.7%, 31.8%, 22.8% respectively versus 11.5% for ENDP. ENDP currently has approximately 3 times the net cash per share of the Company’s peer group1 and applying valuation metrics that appropriately account for cash and debt (i.e., P/E
As mentioned above, we believe that three issues contribute to this valuation gap: 1) inefficient capital structure, 2) publicly stated intention to diversify away from pain management, and 3) the perceived risk of Lidoderm genericization. Each of these topics is worth further discussion:
Inefficient capital structure. As of the end of Q1 2007, ENDP had a net cash position of
$731 million, or 16% of the Company’s market capitalization. In addition, ENDP is generating greater than $200 million of cash per year and growing. The conscious decision to hold all of this cash on the Company’s balance sheet while management continues to assess the strategic landscape is destroying value as the market gives ENDP no credit for this cash. While the Company’s cash leaves it the flexibility to consider and make acquisitions, ENDP has been guiding to complete a near-term transaction for the last 10 months and the present value of the cash asset continues to decline. By more effectively deploying this cash in the near-term, ENDP can substantially improve its present and future valuation with no risk of impairing the ability to pursue a future transaction.
The Company’s large cash position could be used to fund highly accretive share buybacks that would likely create value far in excess of your expected interest income. One option is: a $1.5 billion levered buyback at $35 per share funded using $500 million in available cash and $1 billion in a hybrid debt structure at 5% (2.2 times net debt to CY07 consensus EBITDA1 leverage) would increase earnings per share by more than 20%. In this scenario we believe the Company would retain sufficient financial flexibility to execute appropriate strategic transactions as they arise.
Publicly stated intention to diversify away from pain management decreases attractiveness to strategic acquirers. We believe the Company’s world-class commercial presence in pain management, large and growing product portfolio, and significant cash flow are of obvious value to a wide spectrum of strategic and financial acquirers. Our conversations with investors, advisers, and executives in the healthcare space have supported this view, and we strongly believe that ENDP is an attractive acquisition target. However, we are concerned that the Company’s public intention to diversify away from pain management via a major transaction would meaningfully dilute the value of these assets while also increasing the risk profile of the business. While we are typically very supportive of the Company’s capital being allocated to new opportunities at attractive prices, we are not convinced that such a deal is out there. In fact, the inability to consummate an attractively priced deal over the last 9 to 12 months supports this concern. In these scenarios, we are perfectly happy to benefit from the strong cash flow via an optimized balance sheet.
Even if a strategic transaction is being considered, we believe it is imperative that management and the Board of Directors thoroughly evaluate all strategic alternatives prior to embarking on a major diversification initiative to ensure the highest value to shareholders. As a strategic acquisition candidate, ENDP provides a portfolio of growing pain products already generating revenue in excess of $1 billion per year, a pipeline of pain opportunities, and reliable cash flow of over $200 million per year—all highly valuable assets in the pharmaceutical market. The current market dynamic, which is characterized by near-term revenue gaps, sparse pipelines, and limited new growth opportunities, only bolsters this value. Additionally, there is a myriad of potential synergies in a strategic transaction, including opportunities to commercialize select ENDP drugs outside the United States and to reduce redundant commercial and administrative infrastructure, clinical spend, and overhead.
Lidoderm genericization risk. While the market appears to discount the Company’s valuation based on perceived risks of Lidoderm genericization, we believe the risk to the Lidoderm business is overstated. Specifically:
▪ The Lidoderm IP estate is broad and sound—the product currently has five Orange Book listed patents covering formulation and method of use that must be challenged successfully prior to generic approval.
▪ The Lidoderm IP estate is broad and sound—the product currently has five Orange Book listed patents covering formulation and method of use that must be challenged successfully prior to generic approval.
▪ The Office of Generic Drugs (“OGD”) recommendation on an abbreviated generic pathway for Lidoderm is onerous, particularly in its requirement that the size of patch and level of lidocaine in the patch pre- and post-treatment be identical to the branded comparator, decreasing the possibility of “inventing around” the existing Lidoderm formulation patents. Additionally, the recommendation has not yet accounted for the fact that the Lidoderm label clearly states that the product acts locally rather than systemically and Lidoderm does not cause complete sensory block of the treated area. We expect that OGD and FDA will need to address both of these issues, and possibly the issue of “skinny labeling” before approving a Lidoderm generic
▪ In the event of a paragraph iv filing, Lidoderm will still have 31.5 months of protection under the Hatch Waxman statute after a paragraph iv generic filing (45 days to file suit from notification, automatic 30 month stay of action).
▪ The Company has filed a thorough and scientifically valid Citizen’s Petition that must be addressed by FDA before final action is taken on any application. At a minimum, the Citizen’s Petition should force FDA and OGD to agree on how to treat the questions of local versus systemic efficacy and skin irritation/sensitization when assessing a generic filing
▪ Branded transdermal products historically retain significant revenue after genericization due to the limited number of generic companies with approvable patch capability and the traditional difficulty in manufacturing patches on a commercial scale (e.g., Duragesic, Climara).
While the risk of Lidoderm genericization is out of management’s direct control, we believe management has taken appropriate steps to protect the product by filing a well-reasoned Citizen’s Petition and publicly expressing continued confidence in the current Lidoderm patent estate. However, we believe management is being overly conservative on both the balance sheet and the need to diversify versus the actual risk to Lidoderm.
Despite management’s extremely conservative view of the franchise, we continue to believe ENDP has an outstanding fundamental business in pain management. However, we believe the ongoing valuation gap relative to peers can be addressed by making the Company’s capital structure more efficient. Additionally, we believe the Board of Directors must first consider all strategic alternatives prior to pursuing a transaction to diversify away from pain management. In the absence of taking initiatives to address these issues, we have little confidence that ENDP shares will appreciate to fair value in a timely manner. On the other hand, by pursuing these initiatives, we believe ENDP’s management and Board of Directors will unlock significant value for the Company’s shareholders.
We are happy to meet with management and/or the Board of Directors at their convenience to discuss our views. Thank you for your consideration and we look forward to continuing our constructive dialogue.
D. E. Shaw Composite Portfolios, L.L.C.
James Mackey
Authorized Signatory

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Friday, July 27, 2007

Large Washington Group (WNG) Holder Greenlight Capital Calls Merger Price Inadequate

In a 13D filing on Washington Group International Inc. (NYSE: WNG) today, 10% holder Greenlight Capital disclosed a letter to the Board of Directors expressing their view that the acquisition price in the merger with URS (NYSE: URS) is inadequate. The firm sees a fair value of $117 per share.

In the letter the firm said, "We have determined to vote our Washington Group shares against the proposed merger with URS Corporation and are writing to explain why we think the merger is not in the best interest of Washington Group shareholders. We are not aware of any other large institutional shareholder of Washington Group that is in favor of the deal."

A Copy of the Letter:

Dear Members of the Board of Directors,

We have determined to vote our Washington Group shares against the proposed merger with URS Corporation and are writing to explain why we think the merger is not in the best interest of Washington Group shareholders. We are not aware of any other large institutional shareholder of Washington Group that is in favor of the deal.

We met with the managements of both companies on May 29, 2007 and have reviewed the preliminary proxy materials. To summarize our views, while it is possible that combining the two companies makes sense, the proposed split of value between the companies does not give sufficient credit to Washington Group’s more robust growth prospects. As a result, based on the proposed merger terms, we believe that Washington Group shareholders will do better by rejecting the merger.

We have been long-standing shareholders of Washington Group. We began acquiring a stake in early 2001 and have added to it over the years. We have generally supported management’s efforts and backed management’s view about the optimal capital structure for the company. Our intent has been to be passive, supportive shareholders. However, the proposed merger is so inadequate that we feel required to speak out in respectful opposition.

Problems with the Sale and Sale Process

The Board of Directors relied on a fairness opinion from Goldman Sachs instead of an auction. Considering that the proposed transaction is a sale to a strategic buyer through a non-auction process, the approximate fifteen percent premium to the pre-announcement share price strongly suggests that a higher value could have been obtained through an auction. This is particularly true inasmuch as Washington Group had received unsolicited interest from several parties. If the company determined it was to be sold, we believe it should have either demanded a larger premium or sought additional competing bids through an auction process.

The proposed merger consideration of $43.80 in cash and 0.772 shares of URS common stock per Washington Group share does not represent full value for Washington Group shareholders. Based on our review of the proxy materials, the fairness opinion on which the Board relied contained overly conservative forecasts that do not recognize the real future earnings potential of the Washington Group business. That analysis does not assign value to Washington Group’s substantial tax asset, relies on overly conservative estimates of Washington Group’s earnings potential, and ignores the potential of several major opportunities Washington Group is pursuing.

We believe management’s net income estimates in the preliminary proxy of $88 million for 2007 and $104 million for 2008 (EPS of $2.88 and $3.41 respectively) are too conservative. In 2006, Washington Group had $42.2 million in charges related to problematic highway contracts in Southern California and Nevada and expects another $25 million in losses this year. The problematic contracts are nearing completion, as the largest is expected to be finished this fall. Management has indicated Washington Group no longer participates in the type of bidding that led to the Southwest highway contracts. These losses have at a minimum depressed recent and current results.

We believe that a valuation should attempt to normalize for these losses. Further, Washington Group expects (or at least hopes) to recover some of the monies lost on these projects. While we find it appropriate to exclude claims recoveries in forecasts for the purpose of managing Wall Street’s expectations, we believe that the value of future claims recoveries should be considered when selling the company. Certainly, it is inconsistent to count the losses and ignore the recoveries. The Goldman fairness opinion which relies on IBES (i.e. sell-side analysts’) estimates that exclude claims recoveries and management’s forecast that also appears to exclude claims recoveries, apparently failed to take this into account.

We observe that, adjusted to eliminate the Southwest highway projects, management apparently projects declining gross profit margin and operating margin in 2008. This is not consistent with the favorable environment and management’s view that it is achieving higher margins on new business than it has over the last few years.


On July 16, 2007, Washington Group affirmed its 2007 guidance of $2.60 — $2.92 in earnings per share, which now includes the $25 million charge for the Southwest highway contracts. This further supports the notion that management’s guidance history is based on setting a low bar designed not to be missed even when negative surprises occur. This was the second time in two years the company took a large, unexpected charge for the highway projects and still maintained its guidance.

We met with Washington Group management on March 28, 2007, and discussed Washington Group’s profit potential. Management identified possible adjustments to the 2006 results that would be unlikely to be repeated in future years:

1. Unusual Savannah River project operating earnings of $29 million

2. Reduced amortization expense of $10 million

3. Reduced pension expense of $2 million

4. Elimination of one-time financing costs of $5 million

5. Unusual mining project losses of $11 million

6. Unusual Southwest highway contract losses of $42 million

These items suggested adjusting pretax income for 2006 from $115 million to $155 million to create a baseline for 2007.

Washington Group management was very optimistic about business prospects, including its ability to win new work and to achieve an internal goal of increasing margins by one-to-two percent on new work. The midpoint of management’s guidance for work backlog at the end of 2007 is $6.7 billion, a nineteen percent increase from year-end 2006. While management initially suggested an additional adjustment for reduced work in Iraq, after further conversations management agreed this was not necessary because reduced Iraq work had been taken into account in the backlog forecast.

Management expects eighteen percent revenue growth in 2007. Assuming no margin improvement, pretax income should grow eighteen percent in 2007 from the adjusted 2006 baseline. This implies $183 million of pretax income in 2007, which translates into $107 million of net income and $3.49 of earnings per share. There should be further upside as the company achieves improved margins.

Management agreed it saw this potential and was focused on execution. Management referred us to its comments made on the fourth quarter conference call when CEO Stephen Hanks said Washington Group’s goal is to increase earnings by twenty percent in 2008. Based on our discussion of 2007, this implies estimated earnings of at least $4.19 per share in 2008. Management did not disagree with our view that revenue growth should follow from backlog growth, projected to grow by nineteen percent in 2007. Should the company achieve annual improvements in margins of one percent per year, as the new work flows through the income statement, earnings could be as much as $4.46 this year and $6.37 per share next year. In our meeting, Mr. Hanks then indicated that the five-year operating environment was so favorable he believed twenty percent growth was a good target for several years beyond 2008 as well. We wonder why the management forecast in the proxy is so disconnected from Mr. Hanks’s views.

During the company’s quarterly earnings call on May 10, 2007, Mr. Hanks estimated Washington Group has a deferred tax asset worth more than six dollars per share. Based on the description in the proxy statement, there is no evidence that Goldman took that asset into account in calculating Washington Group’s enterprise value or price-to-earnings ratio. The proposed transaction price of $80 represents a multiple of less than twelve times the company’s earnings potential adjusted for the $6 per share tax asset value.


In the preliminary proxy statement, Goldman highlights a comparable company median price-to-earnings multiple of nineteen times 2008 estimates. From the close of the market on May 25, 2007 to the close of the market on July 25, 2007, the comparable group has appreciated and now trades at an average multiple of twenty-one. We believe the market is better discounting the favorable prospects for the engineering and construction industry as a whole.

If we apply the midpoint of our range of adjusted 2008 earnings estimates ($4.19 to $6.37 per share) to the current industry multiple of twenty-one times and add the six dollars per share of value for the tax asset, we estimate a fair value of Washington Group to be $117 per share. Obviously, this does not reflect a control premium or a portion of any anticipated synergies that should be available to shareholders in a sale.

This analysis also does not take into account claims recoveries or the potential upside from the Sellafield contract. Washington Group is one of four bidders for the contract worth $2.0 to $2.5 billion per year. The contract award is not included in our estimates but could add $2.00 to $2.50 of annual earnings per share for Washington Group during the life of the contract. We believe Washington Group is well positioned to compete for this unique contract and is not being compensated for its potential in the proposed merger.

Based on the above analysis, we believe the proposed merger consideration is inadequate and intend to vote against the deal.

Washington Group’s Opportunity as a Standalone Enterprise

Washington Group is over-capitalized. In the proposed sale, URS would use the cash on Washington Group’s balance sheet and take on additional leverage to try to deliver outsize returns to URS shareholders. URS has repeatedly cited its track record of successfully repaying debt as a corporate strength. On the conference call on May 29, Mr. Hanks cited the opportunity for Washington Group shareholders to “take some cash off the table.” Washington Group did not cite the leverage of the combined company as a negative.

Given that the Washington Group Board has determined that these traits are desirable, the company can create this opportunity for shareholders itself. Washington Group should consider returning its cash to shareholders and taking on debt comparable to that in the proposed sale to deliver outsize returns to Washington Group shareholders.

Management has addressed pressure from other investors to increase leverage by claiming the company risked losing customers if its balance sheet were less conservative. For several years, we have deferred to management’s judgment on this point. However, implicit in the proposed merger is the view that the company can operate with leverage without adverse impact on its business. In light of the Board now adopting a new view, it should reconsider the company’s standalone capital structure.

URS estimates it will have 3.2 times debt to EBITDA post merger. Washington Group should consider recapitalizing at a similar ratio. EBITDA adjusted to exclude highway contract charges for the twelve months ended March 31, 2007 was $207 million. This implies Washington Group has debt capacity of $660 million, which it could use along with cash on the balance sheet to pay a special dividend of $27.50 per share. The related interest expense and foregone interest income would reduce 2008 earnings by about $1 per share. At a constant earnings multiple, this would add approximately $7 per share to the company’s value and give shareholders an opportunity to “take some cash off the table.” Rather than accepting $43.80 per share in cash and thirty percent of the combined URS, Washington Group shareholders could receive $27.50 per share and own all of Washington Group.

Concluding Thoughts

A combination of URS and Washington Group is not by definition bad for Washington Group shareholders. When we met URS management, we were impressed with Messrs. Koffel and Hicks. We believe they could lead a combined company to great success. In addition to a possible $50 million of expense synergies, the proxy describes the advantages URS would have by offering a full complement of services to customers.

However, the proposed merger consideration neither gives Washington Group credit for its full value nor its superior growth prospects. The proposal does not share with Washington Group shareholders (other than through reduced participation as future URS holders) any portion of the synergies. Though a combination may make business sense, we are skeptical that URS will increase its bid to compensate Washington Group shareholders adequately. Like any good management, we believe Messrs. Koffel and Hicks are, in part, attracted to the proposed bargain price in the deal.

We believe Washington Group should remain a standalone company. While we understand that the merger agreement requires that this be brought to a shareholder vote, we would urge Washington Group management to remain focused on Washington Group as a standalone entity and not allow performance to suffer as a result of this distracting process. We have been long-time patient holders of Washington Group and are optimistic about its prospects. We look forward to remaining shareholders.


David Einhorn


Greenlight Capital, Inc.

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Thursday, July 26, 2007

Large Radyne (RADN) Holder Discovery Group Urges The Company To Explore a Sale

In a 13D filing after the close on Radyne Corp. (Nasdaq: RADN), 8.8% holder Discovery Group said it wants the company to explore a sale. The firm said, "Based on our findings, it is very likely that shareholders could achieve at least a 50 percent premium to today's price in the next few months." The firm thinks the company could get $14-$16 per share in a competitive sale process.

The firm said they have been encouraging Radyne to hold discussions with the multiple parties that have shown an interest in Radyne, but management has rejected this approach. The firm urged the company to hire a banker to orchestrate a thorough yet expeditious process to sell the Company.

A Copy of the Letter:

Dear Dr. Waylan: (Chairman)

Discovery Group manages investment funds that own approximately 8.8% of the outstanding shares of Radyne Corporation. We are the largest shareholder of Radyne stock. We have followed Radyne closely for several years and since building our initial investment position we have held numerous conversations and had two on-site meetings with CEO Myron Wagner and CFO Malcolm Persen. Recently, we also met with the Radyne Board’s Special Committee. We invested in Radyne because we believe the current market value is substantially less than the company’s true economic value. However, based on feedback from our conversations with directors and senior management, we believe that inadequate attention is being paid to unlocking this true economic value. Therefore, while it is not customary for us to take this type of action, we feel it is our duty as your largest shareholder to strongly and publicly recommend a course of action for the Board and to request that the Board publicly respond to this proposed course of action.

As you know, our research and discussions with industry participants have suggested that there are multiple parties that are interested in acquiring Radyne at a significant premium to today's stock price. The combination of Radyne's attractiveness as an acquisition, today's robust M&A market, and the high level of interest from strategic buyers will lead to a very attractive valuation for the company. Based on our findings, it is very likely that shareholders could achieve at least a 50 percent premium to today's price in the next few months. As a result, we have been encouraging Radyne to hold confidential, expedited discussions with the multiple parties that have shown an interest in Radyne. However, Radyne’s Board and management have rejected this approach, citing the ability to pursue acquisitions and grow revenues to eventually cause the share price to increase.

We understand that the Radyne management team has an optimistic operating plan and financial forecast. However, as we have carefully calculated and quantified in a detailed presentation to you, we simply do not believe that any such plan can deliver nearly the value that shareholders could get today by simply negotiating a sale to one of Radyne’s potential acquirers. We continue to believe that a sale of Radyne is a superior alternative to the status quo operating plan.

Therefore, Discovery Group strongly recommends the engagement of a qualified investment banker to orchestrate a thorough yet expeditious and minimally disruptive process to sell the company. Given our M&A experience and the intelligence we have gathered from potential buyers, we believe that the likely acquirers are readily known, are familiar with and interested in Radyne, and can put forth their best, fully financed acquisition proposals subject to limited due diligence in very short order.

There is no large shareholder on the Radyne Board or within the management team. We are concerned that the decision not to pursue a sale reflects conflicting incentives. Specifically, management seems focused on remaining independent rather than pursuing an aggressive path to shareholder value. It is for this reason that we feel that we can bring focus to this issue for the benefit of unaffiliated shareholders by requesting an answer to our recommendation in a public response.

Thus, we would like Radyne to promptly explain to us and all shareholders why it will not select this path to maximize value. Your upcoming earnings call on July 30 is an appropriate forum for you to address this question. As you contemplate your response, please try to describe as carefully as possible how management's plan will deliver values greater than the $14.00 to $16.00 per share that should be achievable in a competitive sale process.

Michael R. Murphy
Managing Partner

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Wednesday, July 25, 2007

Biglari Calls Applebee's (APPB) Deal Undervalued, Attacks SEC-Chief Turned Activist Breeden

There is an interesting situation developing in Applebee's!

Activist investors Sardar Biglari, Chairman and CEO of The Lion Fund, L.P. and Western Sizzlin, said he intends to vote against the acquisition of Applebee's (Nasdaq: APPB) by IHOP (NYSE: IHP), calling the $25.50 per share offer below the fair value of the Company.
Biglari said, "I believe Applebee's board has made a grave mistake in agreeing to an undervalued bid for the entire company. This arrangement is most alarming because new board members promised to protect shareholders' interests, yet they have not verbalized any opposition to this ill-advised transaction." (NOTE: This looks like an attack on ex-SEC Chief turned activist Richard Breeden, who was awarded two board seats in April)
Biglari's group holds 1,019,000 shares of Applebee's, about 1.4%.
If you remember, Biglari was successful in unlocking value at Friendly Ice Cream (AMEX: FRN), which recently announced a deal to be acquired by affiliates of Sun Capital Partners, Inc. for $15.50 per share.
To make matters even more interesting - activist investor Daniel Loeb's Third Point LLC owns a 7.2% stake in IHOP.
A Copy of Sardar Biglari's Press Release:
Sardar Biglari, Chairman and CEO of The Lion Fund, L.P. and Western Sizzlin Corp. (OTC Bulletin Board: WSZL), announced today that he intends to vote against Applebee's International, Inc. (Nasdaq: APPB) proposed transaction with IHOP Corp. (NYSE: IHP).
Mr. Biglari Issued the Following Statement Explaining Why He Intends to Vote Against the Transaction:

I want to express to you my concerns about the possible sale of Applebee's (" Applebee's" or the "Company") to IHOP Corp. ("IHOP") for $25.50 per share in cash, a price which I believe is below the fair value of the Company. I believe Applebee's board has made a grave mistake in agreeing to an undervalued bid for the entire company. This arrangement is most alarming because new board members promised to protect shareholders' interests, yet they have not verbalized any opposition to this ill-advised transaction.

My assertions appear supported by the market's response to the announcement of the proposed transaction. On July 13, 2007, the business day prior to the announcement of the transaction, IHOP's and Applebee's stocks closed at $56.25 and $24.38, respectively. Since that announcement, IHOP's market value has jumped by approximately 16%, or $153 million, to $65.02 per share as of yesterday's close of business. However, the stock price of Applebee's, the acquiree, enjoyed virtually no premium, nay less than 1%, as of yesterday's close of business. Usually, it's the selling company, not the buying one, whose stock price appreciates substantially. Clearly, the proposed acquisition price does not reflect the fair value of Applebee's stock, and the substantial inherent value of Applebee's is being transferred to IHOP shareholders, as evidenced by the sizable increase in IHOP's market capitalization. In other words, we believe that if Applebee's undertook the same initiatives as IHOP has in mind, the appreciation IHOP recently gained would, at the very minimum, shift to Applebee's.
Incidentally, we like IHOP's plan to convert Applebee's to a nearly pure franchising model. The future of Applebee's resides in its franchisees. The decision to refranchise would yield several long-term strategic advantages. Applebee's should be in the franchising business for the cogent reason that it would achieve higher profit margins, assume less risk, and require very little in capital expenditures -- all strategic moves leading to healthy cash flows and high returns on capital. Unfortunately, if the transaction is approved, IHOP's, not Applebee's, shareholders are going to realize the benefits of transforming the Company into an asset-light firm.
We believe the proposed transaction represents a losing exercise for the shareholders of Applebee's. As shareholders, we are obliged to ask how Applebee's can be sold at a mere 5.2% premium over the share price as of the trading day (February 12, 2007) before the Company announced that it was exploring strategic alternatives.

We think Applebee's shareholders would realize considerably more money if the Company carries out the refranchising strategy as outlined by IHOP rather than permitting the sale to go through at the currently agreed price.

As Chairman and CEO of The Lion Fund, L.P. and Western Sizzlin Corp., I represent 1,019,000 shares of the outstanding common stock of Applebee's ( including shares of common stock underlying over-the-counter American-style call options). Because of our discontent with the proposed transaction, we are currently exploring all of our options. This Press Release is not a proxy solicitation.

SOURCE Western Sizzlin Corp.

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Tuesday, July 24, 2007

Franklin Resources Opposes KKR Buyout of TXU Corp (TXU)

In a 13D filing this afternoon on TXU Corp. (NYSE: TXU), 5.0% holder Franklin Resources (NYSE: BEN), changing their filing status from 13G (passive) to 13D (active), said the $69.25/share offer price from an investor group led by KKR and TPG is significantly below TXU's current actual value.

The firm said they believe that had the KKR buyout offer not been undertaken, the performance of TXU common stock from the announcement date of the KKR buyout offer to today would have been in excess of the actual level of performance realized by shareholders.

The firm does not support the buyout offer and intends to vote "NO" on the offer.

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NTN Buzztime (NTN) Holder Trinad Capital Demands Changes; Wants Chairman Removed, Board Changes, Evaluation of Strategic Alternatives

In a 13D filing this morning on NTN Buzztime, Inc (AMEX: NTN), Trinad Capital disclosed a 6.6% stake, changing their filing status from 13G (passive) to 13D (active), and a letter to the board demanding that they take immediate action to improve the operating and stock performance and Director accountability.

Specifically, the firm demanded that the Board take the following actions: (i) remove Mr. Barry Bergsman as Chairman of the Board of Directors; (ii) request the resignations of Mr. Bergsman and one other director; (iii) appoint two individuals designated by Trinad as members of the Board of Directors; (iv) amend the Issuer’s bylaws to remove those provisions intended to entrench the incumbent Board of Directors and management, including the elimination of the right to call a special meeting and advance notice requirements; and (v) evaluate all strategic alternatives that would unlock and maximize stockholder value.

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Monday, July 23, 2007

Barington Capital Demands Books and Records from Lancaster Colony (LANC)

In an amended 13D filing this morning on Lancaster Colony Corp. (Nasdaq: LANC), large holder Barington Capital said they delivered a letter to the Company demanding copies of certain books, records of account and minutes of proceedings of the Company in order to enable Barington to ascertain the value of its interest in the Company and to secure information as to the details of the Company's business and the status of its affairs and to investigate whether there are any deficiencies or improprieties in the management and operations of the Company or with the oversight provided by the Board of Directors of the Company.

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Friday, July 20, 2007

Update and New Site Easystockalerts.com is Set to Launch

Pretty slow on the 13D front this week. I'm sure next week will make up for it. Also, 13F season is coming up in the middle of August. We will be taking a close look at Buffett's, Carl Icahn's, ThirdPoint LLC's, SAC Capital's, JANA, and MMI's among others.

Anyway, StreetInsider.com's latest project will be launching next week. I want to give readers an early heads up so you can try it out. The new site is http://www.easystockalerts.com and will basically be an easy way to get real-time alerts on your stocks.

The alerts will come via e-mail, but you can also turn the e-mail off and get the alerts in RSS.

You can track 15 stocks for free and an unlimited number for $19.99 a month.

There are 4 category levels for each stock you want to track:

1. Street Insider reports. These are reports from our main site. They will cover things like earnings reports (major ones), upgrade/downgrades/new coverage, significant corporate news, significant analyst comments, rumors and equity offerings, among others things.

2. Press Releases: This section covers press releases from the major wires

3. SEC filings: 10Q, 10K, 8K, Form 4s and even 13Gs and 13Ds

4. Blogs: This section covers news on your stocks from some of the top financial blogs.

There are many ways on the Internet and other platforms to get news on your stocks, but we think this will be the most comprehensive, fastest and easiest to use. Plus its FREE!

The site is considered a beta version and we will be making many tweaks so please send your feedback to info@easystockalerts.com


Thursday, July 19, 2007

Citadel To Gemstar-TV Guide (GMST); Don't Sell Now - Unless Someone Is Willing to Overpay

In a 13D filing this morning on Gemstar-TV Guide International Inc. (Nasdaq: GMST), Ken Griffin's Citadel LP, an 8.4% holder, disclosed a letter to the company saying that while they welcome the board of directors’ decision to pursue strategic alternatives, they do so with some reservation. The firm said, "we firmly believe that Gemstar-TV Guide has the potential to realize several billion dollars of incremental equity value over the next years based solely on the company’s strategic positioning and management’s ability to execute on its strategy."

The firm went on, "While we are not averse to a sale of the company, we believe any sale must adequately compensate all shareholders for the immense opportunity that lies before Gemstar-TV Guide. In this regard, we do not believe that an investment or takeover by a financial investor is likely to be in the best interest of shareholders given the tremendous strategic value inherent in the company’s assets. We do believe, however, that certain strategic investors may be able to more fully realize the strategic value of Gemstar-TV Guide’s unique assets given the company’s competitive position in the marketplace. If such investors are willing to recognize the full value of this business, we would be pleased to offer our support for a sale of the company."

On July 9th, Gemstar-TV Guide said it would explore strategic alternatives intended to maximize shareholder value, which may include a sale of the Company.

A Copy of the Letter:

To the Board of Directors of Gemstar-TV Guide International Inc.:

I am writing on behalf of Citadel Equity Fund Ltd. (“Citadel”). Citadel is currently one of the largest shareholders of Gemstar-TV Guide and has been a significant investor in the company’s common shares during the past five years.

Following the board of directors’ decision to pursue strategic alternatives for Gemstar-TV Guide International (“Gemstar-TV Guide”), we thought it appropriate to offer our public support for both management and the board of directors. At present, we have no intention of seeking board representation.

Like other long term shareholders of Gemstar-TV Guide, we have closely monitored the strategic steps that management and the board of directors have taken in recent years to better position the company for current and future growth. We have been particularly impressed with the management team CEO Rich Battista has assembled and the strategic direction this leadership has brought to the company.

In our view, Gemstar-TV Guide is uniquely positioned at the nexus of exciting changes taking place in video entertainment consumption, including the transition from analog to digital distribution, new platform developments (IPTV, broadband and mobile), and the significant opportunity to monetize the hundreds of billions of impressions garnered each year on the IPG (interactive program guide) through both advertising (display & search) and transaction-based services.

Despite the company’s strong position in this arena, we do not believe the current market value of Gemstar-TV Guide common stock comes close to reflecting either 1) the current improved state of Gemstar-TV Guide’s operations or 2) the opportunity for independent value creation over the next several years as an increasing number of platforms take advantage of Gemstar-TV Guide’s unique intellectual property.

Therefore, while we welcome the board of directors’ decision to pursue strategic alternatives for Gemstar-TV Guide, we do so with some reservation because we firmly believe that Gemstar-TV Guide has the potential to realize several billion dollars of incremental equity value over the next years based solely on the company’s strategic positioning and management’s ability to execute on its strategy.

While we are not averse to a sale of the company, we believe any sale must adequately compensate all shareholders for the immense opportunity that lies before Gemstar-TV Guide. In this regard, we do not believe that an investment or takeover by a financial investor is likely to be in the best interest of shareholders given the tremendous strategic value inherent in the company’s assets. We do believe, however, that certain strategic investors may be able to more fully realize the strategic value of Gemstar-TV Guide’s unique assets given the company’s competitive position in the marketplace. If such investors are willing to recognize the full value of this business, we would be pleased to offer our support for a sale of the company.

In the event you are interested in discussing these issues, we are always available at your convenience.

Very truly yours,
Citadel Equity Fund Ltd.
By: Citadel Limited Partnership, Portfolio Manager
By: Citadel Investment Group, L.L.C., its General Partner

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Tuesday, July 17, 2007

Loeb's Third Point Reiterated its Demand That PDL BioPharma (PDLI) CEO Be Terminated; Notes Banker Hired

In an amended 13D filing on PDL BioPharma, Inc. (Nasdaq: PDLI), Daniel Loeb's Third Point LLC, a 9.8% holder, reiterated its demand that Mark McDade be terminated immediately as CEO of the Company.

Third Point also indicated its support for a recent directive evidently given to an investment bank to explore strategic alternatives, but expressed the belief that the process will be ineffective so long as Mr. McDade remains CEO.

A Copy of the Letter:

Dear PDL Non-Management Board Members:

We are dismayed by the lack of progress that the Board has made in addressing the concerns that we have set forth, most recently in our meeting in Palo Alto on June 19th. In the four weeks that have elapsed since that meeting, the only official communication that we have received from the Company has been a cursory "form letter" from Patrick Gage. Although we understand that you recently directed your financial and business advisors to explore all options to increase shareholder value, we believe that directive will prove futile so long as Mr. McDade remains CEO.

Accordingly, it is critical that you, the non-management directors, exercise your fiduciary duty and finally take action: terminate Mr. McDade before he is allowed to destroy shareholder value at our Company for even one more day. For the many reasons of which you have been apprised, and understand well, as long as you allow Mark McDade to remain as Chief Executive Officer of PDL BioPharma ("PDL", or "the Company") you are not acting in the best interests of, nor fulfilling your fiduciary duty to, PDL's shareholders.

We know that most of you understand the "chain of command" at companies incorporated in Delaware. However, if there is any uncertainty concerning directors' legal responsibilities, we suggest that you consult immediately with your counsel at DLA Piper, who will certainly confirm to you that:

1) A board of directors must work for, and only for, the company's
2) A company's management team serves at the discretion of the board of
directors and
3) The board of directors is responsible for ensuring that a company's
management team works effectively and in the best interests of the
company's shareholders

Too often we've come across public company directors who don't understand or accept these legal principles, and, in fact, believe instead that they work for, or as equal partners with, a company's management team. We fear, based on empirical evidence, that a minority of the PDL Board members may still hold those erroneous beliefs. As you can imagine, it is in such situations, wherein directors become too closely aligned with senior management, and thus fail to police them properly, that ineffective and/or unethical managers are often allowed to remain in office despite the obvious destruction of shareholder value they cause.

We trust that you are well aware of, and have paid especially close attention to, the recent shareholder-friendly initiatives undertaken by both the boards of Pfizer and Schering-Plough. It is now time for each of you to fulfill your own fiduciary obligations by immediately taking the necessary and obvious " shareholder-friendly" actions to benefit PDL's shareholders.

Many Reasons for McDade's Immediate Dismissal from PDLI

Mr. McDade's record of incompetence, egregiously bad business judgment and serious ethical lapses has been well documented by one of PDL's founders, numerous current and former employees, as well as by Third Point. These concerns undoubtedly have been weighing on your minds as you have been considering the future of the Company. It is abundantly clear that the most immediate, positive, obvious and profoundly shareholder-friendly action that you can and should take is to remove Mark McDade as CEO of our Company. We have presented you with overwhelming evidence, both professional and personal, as to why Mr. McDade's continued employment as CEO of PDL is unquestionably against the best interests of the Company's shareholders, and we know that you have uncovered additional supportive evidence and sources during your ongoing months- long investigation.

1) We have presented you and your advisors with evidence that Mr. McDade
was engaged in discussions with a large pharmaceutical company for
approximately six months in late 2006 and early 2007 that could have
led to an acquisition of PDL in the $32-$34 per share range (or more,
as this was just the initial indicated range). As we have discussed,
at least two in-person meetings were held at the CEO-to-CEO level, many
additional discussions took place with the potential acquirer's
business development head and other senior managers, and investment
bankers were involved in these discussions (which were clearly aimed at
an acquisition of the Company rather than simply partnering
discussions). As we have related to you, we believe that the deal did
not transpire because Mr. McDade insisted on being the only point of
contact at PDL until the very end of the process, was unresponsive to
due diligence demands and was unreasonable in his dealings with this

While we do not believe that $32-$34 is a fair valuation for PDL, we
are very troubled - in fact, astonished - that Mr. McDade kept the
existence of these advanced discussions a secret from the Board, thus
preventing you from fulfilling your fiduciary duties by deciding how
best to handle this process for the benefit of PDL's shareholders.
And, indeed, how do we know whether there have been similar situations
where the Board was kept in the dark, to the collective detriment of
the Company and its shareholders? We believe that this episode alone
is grounds for dismissal of Mr. McDade, as he breached his duty to keep
the Board fully informed of material developments at the Company that
could significantly impact shareholder value, and because he
demonstrated that he cannot be trusted going forward to reveal to the
Board other material information that might be best for shareholders -
versus his own self-interest.

2) We have also provided you with evidence that Mr. McDade did not fully
and honestly communicate to the Board the advice that he received from
the Company's internal and external financial advisors not to move
PDL's corporate headquarters to Redwood City. As we have noted in
previous letters, and as is supported in correspondence that we have
forwarded to you from PDL employees (as well as your own due diligence
on this matter), this move will unnecessarily cost the Company $100
million in up-front costs in addition to significant ongoing
incremental operating expenses. Clearly this money could have been far
better utilized to benefit shareholders by advancing the Company's
pipeline. In addition, many important employees have already left PDL
as a result of the pending move, and many others plan to resign once
the move takes place later this year.

3) We have provided you with some of the considerable unsolicited incoming
correspondence and contacts (unprecedented in our history in both
volume and universally negative sentiment!) showing that PDL has been,
and continues to be, an increasingly dysfunctional company under Mr.
McDade's stewardship. As you are further aware, both from us and your
own investigation, the Company has lost a disproportionate number of
senior employees under Mr. McDade (and Rich Murray as well) in all
areas of the Company - but most alarmingly within the scientific staff.
These employees were either forced out by, or left as a result of,
current management's blatant favoritism and poor strategic vision and
execution. As a result, virtually all of the senior scientists who
developed the critical and innovative technologies that formed the
foundation of PDL are no longer at the Company. Our correspondents and
contacts have universally reported that PDL's work environment is rife
with employee unhappiness and self-interested management, one in which
blind loyalty to Mr. McDade is rewarded over competence, and that PDL
is a company with no coherent regulatory or R&D strategy, in which
senior management is not accessible to subordinates (even those also at
senior levels) and is detached from day-to-day operations. And only
favoritism, or worse, seems to be capable of explaining the mysterious
rise of Jeanmarie Guenot, and, before her, Laurie Torres. To the
extent that the Board continues to retain Mr. McDade, it must shoulder
the ultimate blame for this dysfunctional work environment.

4) As you know, Mr. McDade has consistently disappointed the financial
community by missing the earnings and sales projections and product
development timelines that he has forecast, and has consistently
exceeded expense (both SG&A and R&D) estimates. Moreover, Mr. McDade
has been grossly ineffective in communicating "the PDL story" to the
investment community. Consequently, since our first SEC filing over
four months ago the vast majority of "sell side" research analysts have
spoken out in favor of Third Point's proposals for the Company; you
are, of course, well aware of this, as we've shared many of these
reports with you. However, the fallout from Mr. McDade's mismanagement
and credibility deficit can be seen most clearly in the stock charts we
provided to you as part of our comprehensive 75-page board meeting
handout last month (the summary page of which is attached as an exhibit
to this letter) - PDL's stock has performed woefully in recent years
(before Third Point's investment in the stock was made public),
relative to the stocks of its partners, biotech peers, and the markets
in general. The quantifiable expression of the stock market's view of
the "McDade liability" is that when we accumulated our stake in PDL the
enterprise value of the Company was BELOW the net present value of the
Company's current royalty streams (and we believe it is now trading at
just a small premium to the value of these royalties). In other words,
up until the public revelation of our involvement in PDL's stock (i.e.,
until investors believed that there was hope that change was on the
way), investors ascribed NEGATIVE value to everything in the Company
other than the royalties from the Queen patent portfolio. There is no
better measure of Mr. McDade's value destruction and lack of
credibility with the investment community than the fact that, in the
aggregate, investors believe that PDL's specialty pharma products,
NOLs, real estate, technology platform and entire R&D pipeline have a
negative value in Mr. McDade's hands!

5) Mr. McDade lacks the ability to communicate with the investment
community effectively in part because he has a poor understanding of
even basic financial concepts - another major concern we have
communicated to the PDL Board many times. As we have discussed, he was
puzzled when we discussed the concept of internal rate of return (IRR)
analyses on research and development projects, and indeed called us
back to ask what we meant by this. He readily admitted to us that he
has not properly thought through nor effectively utilized PDL's tax
credits, which has and will result in reduced value for PDL
shareholders. (We do not mean to suggest that PDL's CEO must be a tax
expert - all we expect is that he or she take ownership of the issue
and develop a plan with the appropriate experts rather than ignoring an
important and readily exploitable Company asset.)

Also, as you know, Mr. McDade was the driving force behind PDL's
controversial decision to purchase ESP Pharma, which soon thereafter
resulted in asset writedowns. Incredibly, and embarrassingly, as
recently as two weeks ago Mr. McDade tried to spin the ESP acquisition
to the financial community as a success story - rather than properly
admitting that while it might have made some sense strategically at the
time the deal was struck, given Messrs. McDade and Murray's abject
failure to advance the PDL pipeline effectively, it has ceased to make
sense for the Company and has been, therefore, indisputably

Of course, as evidence of Mr. McDade's lack of financial acumen one
need only look at his demonstrated propensity to overspend wildly. We
have already presented you with our analysis (corroborated by multiple
brokerage research reports that were also included in our information
package, as well as the study being performed by Bain at our request)
showing that PDL is massively overspending on R&D and SG&A versus peer
biotech companies and pointing out that these ratios will soon become
astronomical when PDL's specialty pharma revenues decline as patents
begin to expire in a couple of years - despite what Messrs. McDade and
Gage would have you believe through their attempted manipulation of
numbers. This is, unfortunately, not just an isolated example of his
overspending. Another sobering example is Mr. McDade's experience as
CEO of Signature BioScience directly prior to his joining PDL.
Specifically, we suggest that you read again (and PDL investors not
familiar with Mr. McDade's history as a CEO should read for the first
time) the East Bay Business Times story dated February 15, 2002
entitled "Biotech firm makes deals in new strategy." (1) In this
story (included in your packages along with other stories and
correspondence regarding Mr. McDade's background), you have undoubtedly
noted that the "gameplan" Mr. McDade laid out for Signature is
disquietingly similar to the one he has been trying to implement at
PDL: imprudently and unproductively overspending on R&D and to acquire
products, building headcount exponentially and squandering much-needed
corporate capital by moving unnecessarily to a fancy new corporate
headquarters. What the story doesn't say is that within a year
Signature went bankrupt, in no small part as a result of Mr. McDade's
out-of-control spending. Mr. McDade's stewardship at PDL has shown
that he clearly has not learned his lesson about out-of-control
spending. We sincerely hope that you are struck by the similarities
here and will not allow history to repeat itself at PDL.

6) Lastly, we have presented you with copious correspondence from current
and former PDL employees charging that Mr. McDade has committed serious
ethical breaches at PDL that have compromised the interests of PDL's
shareholders. Specifically, we believe, based on numerous incoming
emails, faxes and telephone calls, as well as our own diligence, that
Mr. McDade has promoted unqualified people to senior positions within
PDL (or allowed them to maintain their jobs) as the result of personal
relationships, not job-based performance. As you are aware, these
issues have often been described as "open secrets" within PDL. While
Mr. McDade's personal life should be just that - "personal" - it has
become a concern of ours (and should be of yours) due to apparent
serious breaches of corporate policy that, most importantly, appear to
have seriously harmed PDL's shareholders.

Each of the six issues above is cause for the immediate dismissal of Mr. McDade and compelling evidence that he is not the right person to lead PDL. In addition, we note that Mr. McDade failed to discuss certain litigation strategies with the Board which apparently led to the resignation of the PDL Board's former Chairman earlier this year; and, he has attempted, unsuccessfully, to sell the investment community on his long-term plan for PDL while at the same time selling significant amounts of his own stock. We also want to remind you that while we have been communicating with the PDL Board about our concerns for over four months, we have had raised these same concerns directly with Mr. McDade for over a year.

In contrast to Mr. McDade's gross and unarguable incompetence, we continue to be impressed with the industry backgrounds and accomplishments of the non- management members of the PDL Board - and appreciate the good reputations that you have built during your respective careers in this field. Again, we urge you to uphold your obligations as shareholder fiduciaries by immediately removing Mr. McDade as CEO before he can further tarnish this Company - and its Board - with the negative and embarrassing reputation that he has so unfortunately earned.

The McDade Investigation

While we were happy to learn that the Audit Committee has recently brought on Latham & Watkins to assist in the ongoing investigation of Mark McDade, we remain concerned about the thoroughness of the investigation, which has already taken many months. Specifically (and we believe that others involved share these concerns), we believe that the attorney initially retained to conduct the investigation, and still responsible for most of it: 1) is not sufficiently qualified to run an investigation of this scope and importance, 2) may not be truly independent, as we fear that PDL's regular corporate counsel may have played an important role in the retention of the investigating firm, 3) has failed to ask pertinent and obvious questions of the interviewees, 4) has been extremely passive in her approach to the investigation (for instance, key former executives and Board members of PDL were not contacted until at least a month into the investigation), 5) has still not contacted important financial advisors with knowledge of the issues being examined, 6) had still not spoken with Mark McDade or other senior executives of PDL as of two weeks ago, 7) was unable to supply the Audit Committee with the arrest record of a key employee whose termination we also support, 8) does not possess the necessary investigative skills, nor mandate to bring in specialists, and 9) has not investigated PDL's or other email systems that are likely to yield important evidence.

We find these lapses impossible to comprehend if this is truly intended to be an earnest investigation. While we are deeply troubled by the negligence exhibited in the investigation, we do want to state clearly that Mr. McDade's removal as CEO should not wait until the conclusion of this investigation; for all of the reasons delineated earlier in this letter (lack of candor with the Board on issues critical to creating/destroying shareholder value, mass exodus of talented personnel from the Company, with more coming imminently; loss of credibility with the financial community; inability to create value for shareholders over many years, etc.), Mr. McDade should unequivocally be removed immediately as CEO regardless of the timing or results of the investigation, while the investigation should be continued as necessary to support the legal argument of terminating Mr. McDade for cause.

It was undoubtedly clear to all of you, given the inexplicably discourteous way that we (by far PDL's largest shareholder) were treated by your Chairman during our meeting last month (which led to one of you taking him to task for it during the meeting) that our views and conversations had not been accurately portrayed to you by Messrs. McDade and Gage in the months leading up to the meeting. We believe that our meeting cleared up these biased, self-interested characterizations and trust, then, that the Board now understands that based on substantial persuasive evidence we are simply asking you to take actions in the best interest of ALL PDL shareholders. Again, to highlight, these actions are to 1) terminate Mr. McDade immediately, and then promptly thereafter, 2) empower a truly independent investment banker to conduct a full and unbiased study of all possible strategic outcomes for shareholders, so that the Board is in full possession of such analysis before making any further critical decisions (as you know, in our handout we presented you with our latest analysis showing that PDLI is worth over $40 per share to a strategic buyer - our due diligence with potential acquirers subsequent to our meeting has confirmed this. However, we are open to whatever outcome is best for PDL shareholders, so long as a true and thorough process, and careful review by the Board, is first conducted.).

As you all know, we have many other specific concerns related to the fact that PDL shareholders' best interests have clearly been given short-shrift under Mr. McDade. However, as we believe that many of these issues will be remedied by terminating Mr. McDade's employment, we will agree to hold off for the very near-term on raising these issues publicly in anticipation of the PDL Board deciding to take immediate action to fulfill its fiduciary duties.


Daniel S. Loeb

Outline for Meeting with PDL Biopharma Directors on 6/19/07

A. Lack of Financial Discipline:

1. R&D as a percentage of product sales is 126% in 2007, 126% 2008E
& 124% in 2009E

a. Most industry comps are <30%,>

b. No comparables even approach PDL's (as Queen patent royalties are not product sales) (additional analysis provided in package)

2. R&D has increased by >41/2X since 2002 (Mark McDade's tenure)
from $58M to $265M

a. Extraordinary R&D expense increase has been (counter-
intuitively) accompanied by a sharp decrease in R&D
productivity, as no NCE's discovered since 2002 have
progress past PI development

3. SG&A has increased by >31/4X, $32M to $105M, since 2004, the
year prior to the ESP acquisition

a. Extraordinary SG&A increase has unfortunately been
accompanied by increasingly negative Free Cash Flow:
($10M) in 2005 to ($25M) in 2007E (ML)

b. Since the ESP acquisition, the percentage increase in
SG&A, 228%, is triple the increase in (ESP) product
sales 69% (incl. Retavase)

c. Headcount has tripled since 2002

B. Inability to Deliver on Plan/Expectations:

1. Ularitide clinical development & partnership delayed (PII
results were released in 4/05)

2. Nuvion development delayed (PI/II results released in 5/05,
PII/III trials continue to enroll)

3. Consistently misses EPS & revenue expectations (despite
providing company guidance)

C. Circumvention of the Board:

1. Acquisition negotiations with major pharma (in H2 '06) not
disclosed to Board of Directors

2. Lawsuit filed without thoroughly venting with Chairman/Board
(led to exodus of PDL's Chairman who stayed with Alexion).

3. Internal & external financial advisors counseled McDade against
moving headquarters

D. Support for Third Point's Position from Multiple Constituencies:

1. Dr. Cary Queen's public letter & website-

2. Respected biotech CEO, Jean-Jacques Bienaime, proactively joins
Third Point's effort

3. Plethora of employee correspondence (copies provided in package)

4. Wall Street sell-side analysts: Merrill Lynch, Prudential,
Wachovia, Deutsche Bank, Susquehana, Leerink Swan (copies
provided in package)

5. Preponderance of shareholders, incl. largest during past decade,
support Third Point

6. Stock price appreciation follows Third Point's involvement
(events graph provided)

E. Reasons to Add 3 Third Point Nominees to PDL Board:

1. Experience making money for our investors- grown assets from $6M
to $6B in 12 years

2. Experience restructuring biotech companies, i.e. Ligand, Nabi,
Ception (Fulcrum)

3. Experience working collegially & productively with
existing/legacy boards

4. Abundance of value-added industry contacts, incl. CEO's, BD
execs, analysts, IB's

5. Bring a differentiated, Wall Street oriented

perspective/expertise to augment the existing Board member's
scientific, legal & operational expertise

6. PDL's shareholders & analysts have spoken with their wallets and
their recommendations


1) Add 3 Third Point nominees to PDL's Board of Directors

2) Slow the progression of the Ularitide & Nuvion Partnerships
until all alternatives are considered. Note that antibody
company valuations (i.e. Medimune $15B, Domantis $454 {pre-
clinical assets}, Cambridge Antibody $1.2B {3% royalty on
Humira}) far exceed that of specialty pharma companies
(additional analysis provided in package).

3) Replace Mark McDade as CEO

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Shamrock Activist Said Reddy Ice (FRZ) Buyout Offer Undervalues the Company

In an amended 13D filing on Reddy Ice Holdings, Inc. (NYSE: FRZ), 5.4% holder Shamrock Activist Value Fund said GSO Capital Partners' $31.25/share buyout of the company substantially undervalues the business. The firm said their DCF shows that the intrinsic value of Reddy Ice is ~$42-$44 per share.

Shamrock proposed: Pursue a leverage recapitalization, Raise $110M of debt, Do a self-tender for 3.3M shares (~15% of outstanding shares) at $33 per share.

The firm said, "Allow some shareholders to exit at a higher valuation than the GSO offer, while allowing shareholders who appreciate the long-term potential of the business to have the opportunity to capture a significantly higher return."

Shamrock paid, on average, about $28 per share for its stake. The 11.6% return is clearly not enough for the firm.


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