Activist Shorts Austerity, Goes Long M&A

NEW YORK (TheStreet) -- Presenting his investing strategy between funds that scored on recent divestitures by Barnes & Noble (BKS) and AOL (AOL) and Carl Icahn at a conference of top activists this week, Jeffrey Ubben, a lanky and tan San Francisco-based hedge fund manager, seemed out of place.

Ubben, who heads ValueAct Capital, a fund with nearly $7.5 billion invested in stocks including big positions in Motorola Solutions (MSI), Adobe (ADBE) and Valeant Pharmaceuticals (VRX), has the contrarian nature to put his money behind corporate turnarounds. That's nothing revelatory among activists, however, amid C-suite caution, the pruning of industry giants like Pfizer (PFE), Kraft (KFT) and ConocoPhillips (COP) and an investor focus on quickly unlocking post-crisis share value, it's Ubben's calls for spending, M&A and investment in top line growth that distances his strategy from activist peers.

ValueAct Capital's head makes the case for M&A and earnings growth

"We're always fighting the last war in this age of austerity. The problem is that like people don't trust the government, they don't trust their companies," Ubben told TheStreet after making an investing presentation on Adobe and speaking on an activism panel at the IMN Active-Passive Investor Summit on April 30.

Trust in corporate management is about the last thing that would be associated with the lions of shareholder activism, from Carl Icahn to T. Boone Pickens, but Ubben's investing record shows he is of a similar species. Since founding ValueAct in 2000, Ubben says that across 64 investments the fund has grabbed 32 board seats, pushed for 25 management changes and seen 20 sales.

Right now, it's Ubben's view of what his biggest investments should do to position themselves for share gains that makes him a contrarian beyond traditional activists, as markets continue to push new highs from a March 2009 bottom in the S&P 500 Index.

Where an activist may zero in on cutting costs for earnings per share growth, Ubben is investing in a digital content transformation at Adobe that has it poised for durable top line growth. Meanwhile, he sees acquisitions as a key opportunity for Valeant Pharmaceuticals, which after a string of cost cuts, is a post-crisis M&A aggressor.

About companies where Ubben says ValueAct has board seats or management's ear, "we force them to take risk, especially in a downturn."

An April poll of corporate executives by Ernst & Young showed interest in mergers falling significantly in the first quarter, with just 31% of C-suites interested in cutting large deals, the smallest deals appetite since early 2009 and down from over 50% in previous quarters. Sharply falling M&A volumes and advisory-based earnings reflect that caution. Yet at the same time, CEOs are sitting on piles of cash and pouring it into share buybacks and dividends.

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