Can activist investors be divided into “white” and “black” hats? “Friendly” activist hedge fund manager Jeff Ubben thinks so.

“I think the white hat, black hat thing is fine,” Jeff Ubben said, approving of the labeling of activists based on their tactics.

Jeff Ubben prefers working with the management

Speaking on a panel discussion regarding activist hedge fund investing at the Milken Institute Conference in Los Angeles, Jeff Ubben said he prefers working with management, not against them.  “I would define the ‘black hat’ as the activist investor whose first call with an agenda is the media, and the second call is the CEO.  Even those guys you mentioned (Dan Loeb, Bill Ackman and Carl Icahn) have tried not to do that, but I think their inclination and temperament is to do it that way. I find that a very black hat like because you don’t try to engage with the company you are trying to engage a public agenda that has a short-term goal.”

Activist Barry Rosenstein of JANA partners was the most aggressive among the “friendly” activists.  “I don’t think it’s good or bad,” he said, providing cover for those activists who engage in what is considered bullying tactics. “Everyone has their own approach.  I’m happy to be friendly as long as the company does what I want them to do. That defines our relationship with management.”

Rosenstein is aware of his reputation as a hatchet man and recognizes its value.  “The good news is companies don’t want to tangle with us any longer.  It’s getting a little boring,” he said, noting that the last seven deals he did the fund “just showed up” and the board rolled over.  His process is to take a position, call the CEO, privately meet with them before anything is made public, such as demands to change the company.  “In the last seven deals I called the CEO, laid out for them what I thought they needed to do, and they just did it.  They didn’t want to fight. I think it’s a good evolution (for companies to be compliant to the wishes of activists).”

Reputation matters

“It’s about reputational equity,” said Chris Teets of Red Mountain, who backs away from a company he thinks are being mismanaged. Barry Rosenstein, on the other hand, said he likes companies that have management issues, which he approaches and has a heart to heart with the CEO to discuss the “alternatives.”

“When I sense that management is not forthcoming, I go deeper,” Rosenstein said. “You can take our ideas, implement those ideas, be the agent of change,” to which Jeff Ubben  disagreed, implying that Rosenstein doesn’t give credit to the company.

Rosenstein plowed ahead, discussing the inside of the activist “intimidation” strategy.  When companies disagree, they have alternatives, he said.  If you don’t follow his plans, “The alternative is you can fight me,” the activist hedge fund manager said, outlining the options given to CEOs he targets.  If the company CEO does not submit “then you will go through a very public (and potentially damaging) campaign. You’re going to end up making the same changes anyway and be viewed as weak and dragged to the finish line.  So take your choice,” Rosenstein said, give in to the activist or fight.

“Every now and then you have to wack (a CEO)”

Rosenstein said he got in trouble last year for saying publicly “every now and then you have to wack someone (a CEO) for them to realize” you’re serious, which brought laughter from the panel at the frankness of the intimidation strategy laid bare for all to recognize.

Activist Investors and the Search for Alpha