Genesco (NYSE: GCO) closed at $33.06 Thursday, Finish Line (NASDAQ: FINL) closed near an eleven-year low of $3.05.

The chancery court in Nashville, Tennessee found that GCO did not commit fraud in the sale of the company to FINL, and ruled FINL to proceed with the acquisition of GCO.

FINL, with a market cap of $145 million, announced on June 18, 2007 the acquisition of all of GCO outstanding shares for $54.50 in cash.

Goldman Sachs says: "Litigation surrounding the transaction is far from over and completion of the transaction remains uncertain."

GCO overall option implied volatility of 102 is above its 26-week average of 36 according to Track Data, suggesting larger risk.

FINL overall option implied volatility of 155 is above its 26-week average of 85 according to Track Data, suggesting larger risk.

Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Back in August, I wrote about all the beaten-down shoe stocks currently on the market: companies like Rocky Brands (NASDAQ: RCKY), Finish Line (NASDAQ: FINL), Phoenix Footwear Group (AMEX: PXG), and Shoe Pavilion (NASDAQ: SHOE).

Basically, selling shoes without a strong brand name is a tough business. Companies like Phoenix and Rocky are seeing their margins crushed by competitive forces, and retailers like Finish Line, Shoe Pavilion, and Genesco (NYSE: GCO), owner of stores like Journeys, are having a hard time making any money.

Innovation is they key to success in the industry, and there have been a few stories recently about companies looking to do just that. Nike (NYSE: NKE) and Foot Locker (NYSE: FL) have teamed up to launch House of Hoops, which aims to be a "destination" for basketball consumers.

At its Nike stores as well, the leading basketball footwear company is realizing that, to differentiate itself and expand margins, it will have to provide customers with more than just a nice shoe: they need a unique shopping experience.

It's no secret that most mergers and acquisitions fail to create value. The Wall Street Journal's "Manager's Journal" takes a look at a common problem with mergers:

But if the past is a guide, markets will focus on assets, portfolios and business synergies and overlook a key to whether the deal is successful: people.

People issues are often the root of failed deals, our research shows. That is because they are frequently an afterthought in the frenzy of a deal. Dealmakers gather reams of financial, commercial and operational data. But they often pay scant attention to what we call human due diligence -- understanding the culture of an organization, the roles that individuals play, and the capabilities and attitudes of its people.

This is certainly the strategy of Warren Buffett, whose conglomerate Berkshire Hathaway Inc, (NYSE: BRK.A) has grown successfully bu focusing on acquisition with strong management that wants to stay on. Berkshire avoids integration/people problems by integrating new companies as little as possible.

Given the importance of relationships in the outcome of deals, you have to wonder if some of the more conentious buyouts are doomed to fail.

For instance, The Finish Line Inc. (NASDAQ: FINL)'s acquisition of Genesco Inc. (NYSE: GCO): When Genesco reported a bad quarter, Finish Line suggested that it might attempt to back out of the proposed merger agreement. Now lawsuits and rhetorics are flying and shares of Finish Line are scraping 5-year lows. It raises the question: If the merger does end up being completed (Possibly because Finish Line has no choice), will these people be able to work together?

For a list of other deals that could find themselves struggling because of people problems, check out Private Equity Deals that have Hit Snags. In consummation isn't smooth, then integration is unlikely to be a doozie either.

Finish Line's (NASDAQ: FINL) agreement to acquire its larger rival Genesco (NYSE: GCO) appears to be in jeopardy. Last month, Finish Line announced that it was "evaluating its options regarding the agreement after Genesco reported a bad quarter.

Now Genesco has sued Finish Line in an effort to consummate the merger. From the unusually colorful press release announcing the lawsuit:

Commenting on the filing, Genesco Chairman and Chief Executive Officer Hal N. Pennington said, "No more delays by The Finish Line and UBS; no more reservation of rights; no more bankers' putting their pencils down. We want a court of competent jurisdiction to enforce our rights under the Merger Agreement and for The Finish Line and UBS to live up to their obligations."

Genesco (NYSE: GCO) reported disappointing results for its second quarter, and now its agreement to be acquired by Finish Line (NASDAQ: FINL) may be in jeopardy.

Finish Line "issued a statement" regarding Genesco's results. According to the press release, "The Company is disappointed with Genesco's second quarter fiscal 2008 financial results ... the Company is evaluating its options in accordance with the terms of the merger agreement. The Company does not intend to make further comments at this time."

Sounds like it's going try to find a way to back out of the deal. Shareholders for both companies have spoken up about how they feel about that. Genesco has wilted 13% on the news and Finish Line is up more than 12% -- on news that it will consider its options with regard to a previously-announced merger.

It's not yet known whether Finish Line will be able to back out of the deal, and at what cost. But given how positively the Street reacted to the possibility of Finish Line backing out, the management has to be dying to get out of this thing.

MOST NOTEWORTHY: AmeriCredit (ACF), LTX Corp (LTX) and Foot Locker (FL) were today's noteworthy downgrades:

• Goldman cut AmeriCredit (NYSE: ACF) shares to Sell from Neutral to reflect the challenging rate and credit environment.

• Friedman Billings has concerns about LTX Corp's (NYSE: LTX) largest customer, Texas Instruments (TXN), losing market share in the handset baseband market, which has already impacted Texas' equipment test orders from LTX. Friedman Billings cut LTX Corp to Market Perform from Outperform.

• Foot Locker (NYSE: FL) was downgraded to Neutral from Overweight at JP Morgan, citing the disappointing Q2 results...

OTHER DOWNGRADES:

• Genesco (NYSE: GCO) was cut to Neutral from Positive at Susquehanna.

• Soleil downgraded Sonic Solutions (NASDAQ: SNIC) to Hold from Buy.

• Raymond James downgraded New York & Co (NYSE: NWY) to Underperform from Sell.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MAJOR PAPERS:

• The IRS is looking at derivatives trades of Citigroup Inc (NYSE: C) and Lehman Brothers Holdings (NYSE: LEH) to see if trades made on behalf of hedge funds and other clients, including those offshore, were to avoid paying taxes on U.S. stock dividends, reported the Wall Street Journal (subscription required).
  
• The Financial Times (subscription required) reported that Telecom Italia (NYSE: TI) is expected to sell its stake in Brasil Telecom (NYSE: BTM).

OTHER PAPERS:

• The New York Times reported that Ford Motor Company (NYSE: F) is expected to receive opening bids today for its Jaguar and Land Rover units. A variety of companies, including private equity firms and possibly other automakers, are expected to bid for the two divisions, said people with direct knowledge of the situation.
• Retail shoe store chain Foot Locker Inc (NYSE: FL) is reportedly considering putting itself up for sale again, after disappointing sales by its U.S. shoe stores and its failed attempt to acquire rival Genesco Inc (NYSE: GCO), reported the New York Post.
• The Telegraph reported that Wal-Mart Stores Inc (NYSE: WMT) is examining a deal to invest in Beijing Hualian, one of China's biggest retail groups.

MOST NOTEWORTHY: Websense Inc (WBSN), Dow Jones & Co, Inc (DJ), Krispy Kreme Doughnuts (KKD), US Airways Group, Inc (LLC), Starwood Hotels & Resorts Worldwide, Inc (HOT) were today's more noteworthy downgrades:

• Jefferies downgraded Websense Inc (NASDAQ: WBSN) to Underperform from Hold with a $20 target to reflect slowing growth in the URL market, near-term business disruption from the pending SRF deal and summer software seasonality.

• Dow Jones & Co (NYSE: DJ) was cut to Hold from Buy at Gabelli and to Market Perform from Outperform at Wachovia.

• Krispy Kreme (NYSE: KKD) was downgraded to Neutral from Overweight at Prudential.

• Merrill Lynch downgraded US Airways Group (NYSE: LCC) to Neutral from Buy.

• Goldman downgraded Starwood Hotels (NYSE: HOT) to Neutral from Buy to reflect the weaker-than-expected quarterly fundamentals reported by the major hotel companies. The firm believes investors should stay away from the lodging sector...

OTHER DOWNGRADES:

• JP Morgan cut Federated Investors, Inc (NYSE: FII) to Underweight from Neutral on valuation.

• Genesco Inc (NYSE: GCO) was downgraded to Market Perform from Outperform at Piper Jaffray.

• UBS cut Liz Claiborne (NYSE: LIZ) to Neutral from Buy.

• Tibco Software Inc (NASDAQ: TIBX) was cut to Hold from Buy at Jefferies.

• Baird downgraded Watts Water Technologies, Inc (NYSE: WTS) to Underperform from Neutral.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Foot Locker's (NYSE: FL) initial bid of $46 per share for Genesco (NYSE: GCO) was rejected by the company's board as being inadequate. Foot Locker operates over 3,400 stores in the United States, Canada, Europe, Australia, and New Zealand. The company is primarily known for selling athletic footwear, and its workers wear black and white striped shirts modeled after those worn by football referees.

Genesco is the owner of Journeys, probably the coolest footwear store going, as well as Lids and several other brands including Johnston & Murphy. An acquisition of Genesco would be a way for Foot Locker to expand out of basketball/tennis shoes, and move toward targeting a broader market.

It's not surprising that Genesco's board unanimously rejected the offer as the stock is currently trading at over 50 dollars, indicating that investors think the company is worth more. According to Hal Pennington, CEO of Genesco, Foot Locker's CEO Matthew Serra said in a discussion "'Of course, we can go higher,."

Now I don't claim to be a negotiating expert. But when you offer someone 46 a share and say "Of course, we can go higher," how can you reasonably expect them to take the offer? If Foot Locker's CEO said they would go higher, Genesco had no choice but to reject the offer.