So what do you do if your company produces mostly heavy, inefficient vehicles as gas soars past $4 a gallon? Some might say you should produce more efficient cars. But not Chrysler, which has instead opted to make gas cheaper, guaranteed!

Today, Chrysler CEO Bob Nardelli announced that anyone crazy enough to buy a heavy, high-horsepower, low-mileage Chrysler product before May 31 will be able to buy gas for no more than $2.99 a gallon for three years. Just take your shiny new Aspen or PT Cruiser to the gas station and use your special gas card; Chrysler will pick up the cost over $2.99 a gallon.

Some critics are calling this plan a cheap gimmick. But there is no denying that Chrysler is at a disadvantage relative to General Motors (NYSE: GM) and Ford (NYSE: F) when it comes to offering new cars that get decent mileage. And it is light years behind the auto design leaders, Toyota (NYSE: TM) and Honda (NYSE: HMC). So it needs some kind of gimmick to help its dealers clear out the cobwebs that are quickly forming on their lots.

In recent years, Chrysler has relied heavily on trucks and SUVs for sales, and its hot new cars like the Challenger are gas guzzlers. (Hey, your Hemi sure is fast! Sorry about the 11mpg!) Its lineup is in desperate need of an overhaul and products that offer decent mileage. But developing new cars is difficult and very expensive, and it's not clear that Chrysler's owner, Cerberus Capital Management, has the money to do it. The alternative -- advertising and sales gimmicks, long favorites in Detroit -- is cheap by comparison.

This promotion might work, at least for a few weeks. But it points to much larger problem: Chrysler doesn't have the goods to compete right now, and it's not clear when it will, if ever.

They say private equity is the smartest of smart money, able to generate massive profits out of thin air. Well, the folks at Apollo Management probably aren't feeling too smart today, as their $1.3 billion investment in Linens 'n Things has taken a significant turn for the worse.

Linens 'n Things has now confirmed the growing speculation that it would declare bankruptcy. As Zac Bissonnette reported in April, the company lost $242 million in 2007, after the company had gone private in February of 2006. In the last few months, it was said to be having trouble with its suppliers, which rightly feared providing it with credit and merchandise.

The odd thing is that many private equity funds saw the housing and credit crunch coming. It would stand to reason that a billion dollar chain that feeds on the housing market may not be the best investment towards the end of a great speculative housing boom, but I guess the people at Apollo thought they could work their magic whatever the market conditions.

The good news is that Linen Holdings has secured $700 million in financing from GE Capital. This should enable the company to continue operating as it restructures, although it will close 120 stores. But at least the majority of its 17,000 employees still have hope that they won't lose their jobs, at least not right away.

In November of 2006, Thomas H. Lee Partners and Bain Capital announced that they were pursuing a deal for Clear Channel Communications (NYSE: CCU). It took a few months to reach an agreement, but in May 2007 buyout terms were reached, and shareholders approved the deal in September. The deal is worth nearly $20 billion, one of the largest buyouts in history.

As of noon today, Clear Channel is trading at $33.94, a significant discount to the buyout price of $39.20. This suggests that there is considerable -- and growing -- skepticism about the deal. Concerns include the weak track record of recent big buyouts as well as the uncertain prospects of commercial communications companies like Clear Channel, which face growing competition from internet-based services and MP3 devices.

The Financial Times, via MSN.com, is reporting that while bankers involved in the deal still think it will probably go through, there is some resistance. One banker is quoted as saying, "there are a lot of undercurrents, including the fact that the returns for the sponsors are terrible and the break-up fee isn't huge." The 'not huge' break-up fee is $500 million -- not a small amount for your average music lover, but small enough when compared to massive losses on a $20 billion deal.

Like just about everyone else, before I buy any kind of tech device, I always do some research online. One of the best sites for reviews is CNet, which goes to great lengths to analyze and compare everything from digital cameras and MP3 players to laptops and audio speakers. Despite the great service, though, the company has had a lot of trouble staying in the black.

Today, DealBook is reporting that Jana Partners is leading a consortium which has taken major stake in CNet Networks (NASDAQ: CNET). The consortium is trying to replace CNet's directors and take control of the company's board. Jana Partners is a $5 billion hedge fund founded by Wharton grad Barry Rosenstein in 2001. The consortium focused on CNet includes Sandell Asset Management and Spark Capital, a venture capital firm.

CNet has performed poorly over the last several years, and is currently in the red. Despite the impressive growth of online advertising, especially at tech-related sites, CNet has experienced falling revenues. One problem may be that it is simply too big. The 15-year old company has over 2,500 employees, and finds itself competing with similar sites that have only a few dozen people behind the scenes. No doubt that will be something the activists focus on as they seek control of the company.

Sam Zell formally completed his buyout of the Tribune Company yesterday. It only cost $8.2 billion and months of difficult negotiations -- but now he can go out and get the pitching his newly acquired Chicago Cubs have long needed to win it all. Well, maybe not. Word on the street is that he plans to sell the Cubs and Wrigley Field for a cool billion as soon as he can.

Zell has made it clear that he plans on allowing the various units within the Tribune Company to stand on their own feet. By his count, there are over 60 entities within the company, and each one needs to strike out on its own. As Zell put it, "As I've said over and over again, there are something like 60 entities in the Tribune Co. and I view it as 60 ways to get lucky."

David Bonderman, a founding partner of TPG Capital (formerly the Texas Pacific Group), recently stated that he has no immediate plans to take his firm public. However, he did indicate that virtually all of the major private equity firms will probably be public companies within five years. If that's the case, he hopes TPG will be one of the last to go that route.

"Being public is not my favorite thing," Bonderman said in an interview with Reuters. Indeed, it is odd that aggressive investors who profit largely by taking public companies private would want to go public. Bonderman said that is a "delicious irony" that the Blackstone Group (NYSE: BX), among others, went public even as it continued taking other firms private.

So why do private equity firms go public? The answer is simple: it's where the money is. Going public allows investment firms to gain access to massive -- and liquid -- capital markets. Of course, it also provides GDP-sized payout to the principals. But as Blackstone has shown, it doesn't necessarily mean that the firms suddenly have to become more transparent. As Malon Wilkus, the CEO of American Capital Strategies, states in this interview with The Wall Street Journal, "The management company doesn't have to provide much transparency about the individual investments at all. They probably don't have to give details on the returns of the funds." And if the reporting requirements that come with being publicly traded companies prove to be too onerous, the firms can always profit by doing what they do best: they can take themselves private once again.

"Score one for the barbarians" -- so reads the New York Post today. The reference, of course, is to Barbarians at the Gate, the sordid tale of the leveraged buyout of RJR Nabisco in the 1980s. Today, the private equity barbarians have won another battle: there will be no new tax on carried interest, at least not this year.

Charles Rangel, the House Ways and Means Committee Chairman has dropped a proposed change in the tax laws that would raise taxes on hedge fund managers. The change was relatively simple, raising the tax rate on fund profits and management fees from the current 15% to the 35% that corporations (are supposed to) pay. Needless to say, the private equity industry fiercely opposed the change, which would have raised $54 billion in new taxes.

The change in the tax code was part of a bill aimed at alleviating the effects of the Alternative Minimum Tax, which now affects 23 million households. The idea was to "fix" the AMT to keep it from being applied too broadly; the resulting loss in revenue could then be made up by increasing taxes on fund managers. But it looks like the managers are too powerful to allow that to happen, at least this time around. Hey, do you think this could have anything to do with campaign contributions and the growing political power of the newly gilded elite? Nah, couldn't be . . .

A number of news reports in the last few weeks have drawn attention to the involvement of private equity firms in health care companies, particularly nursing homes. Now comes news that Congress wants to look into the situation. Senator Hillary Clinton of New York, a Democrat, and Republican Senator Charles Grassley of Iowa have asked Congress to investigate the situation.

The source of the growing concern about care at for-profit nursing homes owned by private equity firms is an article in The New York Times published in September. The title of the article sums up the situation pretty well: "At Many Homes, More Profit and Less Nursing." It seems that when private equity gets involved in providing nursing care, more money goes toward making investors comfortable and less toward the elderly folks who actually live in the facilities.

I doubt that too many readers will find this claim surprising. Private equity funds search for return on investment. If a couple thousand old people live a little less comfortably, or die a little sooner -- well, too bad. Profits must be made, and the higher the better. What may come as a surprise, though, is the size of this market. For example, the Carlyle Group plans to buy Manor Care Inc. (NYSE: HCR), the largest U.S. nursing home owner, for $4.9 billion. That's an awful lot of bedpans.

And it turns out that private equity firms are ideally suited to run these operations -- assuming that what you want is the highest possible profit rather than, say, excellent care for the elderly. Private equity excels at wringing out costs, and so has no trouble firing many of those expensive nurses who take care of the patients. Private equity also loves to create debt and ownership structures so complex that no one can figure out who actually owns a business -- thus shielding the owners from lawsuits. And the nursing home business deals with a powerless group of consumers, many of whom are subsidized by government payments. No wonder private equity firms are jumping into the sector! Just hope that your elderly relatives stay healthy and strong.

Earlier this week, papers filed with the SEC showed that a group of investors have purchased a 9.5% stake in Steak n Shake (NYSE: SNS). Steak n Shake is a major American restaurant chain, with nearly 500 locations throughout the Midwest and southern US.

The SEC documents indicate that HBK Management LLC leads a group of investors who have paid $412 million for 2.7 million shares of the company. HBK, based in Dallas, Texas, manages roughly $13 billion in equity capital, making it one of the larger private investment funds. The firm is named after Harlan B. Korenvaes, former Managing Director of Merrill Lynch & Co. (NYSE: MER). He founded HBK in 1991, starting with $30 million in capital.

Steak n Shake shares surged on news of the investment. Share prices had fallen in May with the company's announcement of reduced guidance for 2007 earnings, and were trading in the $15 range before the new investment. Shares have rebounded to the $17 level, up roughly 15%.

Steak n Shake is headquartered in Indianapolis. It offers a hybrid of fast food and restaurant dining, with made-to-order hamburgers (the justly famous "Steakburger"), real silverware, and milkshakes that actually contain milk. The investors say they have no plans to take control of the company, but rather seek to develop new strategies to improve the company's performance.

A recent piece in the New York Times points out that we are witnessing one of the largest waves of mergers and acquisitions in history. It looks like 2006 will rank fourth in M&A activity, behind only 1998, 1999 and 2000. The top year was 2000, which saw $2.4 trillion in mergers and acquisitions. This year's tally will be in the $1.8 trillion range.

This boom may signal a peak for stock values. M&A tends to peak when equity prices are high. According to economists Andrei Shleifer and Robert Vishny, this tendency is related to the short time horizons of corporate managers. You might think that fully valued companies would not make good targets, since their valuations will likely fall in the future. But managers see opportunities for quick profits by swapping and unloading stocks. The deal may not make sense in the long run, but in the long run that will be someone else's problem.

Another obvious reason for high levels of M&A is that debt is so cheap. Right now it's easy for firms to raise money through debt, and this drives up the potential price of target companies.

The bottom line is that a boom in M&A activity may be a bearish sign for the stock market. Stocks may not have much more room to go up, and the downside is looking steeper. The decline in stock prices after the 2000 M&A peak was dramatic, and should serve as a warning for investors today.

The last few quarters have seen a remarkable number of takeovers, buyouts and mergers. M&A activity is near an all time high, as the staggering amount of money sloshing around the global equity markets looks for something, anything, to buy. Interest rates are low, the money supply is growing (see this analysis of the now stealth M3 data over at the bigpicture), and private equity funds are competing with each other to find profitable investments. All of this adds up to a manic takeover market, and savvy investors are looking for a way to profit from it.

The Wall Street Journal speculates today [free link to AOL Money & Finance] on the latest potential takeover targets. The housing sector provides some interesting targets, since many housing stocks have been beaten down amid all the talk of the housing bubble. The article cites builders Lennar, Ryland Group and D.R. Horton as stocks to watch. Real estate investment trusts (REITs) may also be of interest.

Potential targets also include very large companies with good cash flow. These include Sprint Nextel, Hilton and Avis Budget Group. All of these stocks are up recently, perhaps due to investor speculation about possible takeovers.

One interesting note: The article points out that takeover activity is not as profitable as it once was. The takeover premium has fallen from 30% in 2001 to 17% in 2006. I would guess that this is largely a result of high levels of competition -- there's so much free-floating investment money out there that wildly profitable acquisitions tend to get snapped up right away, leaving less lucrative deals for later. The lower premium suggests that we may be in the late stages of takeover mania, and that takeover activity may fall after the next few quarters.