A reformed corporate raider, Barry Rosenstein now starts his days with a long yoga practice. The resulting inner peace seems to stay with him throughout his workday as an event-driven, value-oriented hedge fund manager. That calmness also imbues his approach to activist investing, which is respectful and collaborative while at the same time relentless.
As founder and managing partner of JANA Partners LLC, Mr. Rosenstein has guided the firm over the past 13 years from a three-person startup in a rodent-infested storefront in San Francisco to a gorgeous headquarters on Manhattan's Fifth Avenue.
Although activism accounts for only a fraction of the assets in JANA's flagship hedge fund, the company's success has attracted huge notice over the years with an impressive campaign win list, including Kerr-McGee Corp., Houston Exploration Corp. and Charles River Laboratories International Inc. Now, JANA and Agrium Inc. are at odds over the hedge fund manager's recommendations for changes to the structure and board of the Calgary, Alberta, fertilizer manufacturer.
Mr. Rosenstein got his first practical experience as an investment banker in the heady days of hostile takeovers in the late 1980s under the tutelage of iconic raider Asher Edelman. He spent the decade of the 1990s working on his own deals before launching JANA in 2001.
How did you get your start in money management? There's always one hot area for jobs and when I was getting out of business school, it was investment banking. I managed to get a job at a boutique investment bank, but the week I started the firm got sold and I was out of a job. So that was my start on Wall Street.
Fortunately, I soon got a job at Merrill Lynch & Co. Inc., where I worked in the investment banking and merger departments. This was during the mid-1980s, the era of the corporate raider. I would read newspaper stories about the deals and get excited.
Did you want to be a corporate raider? Yes! I cold-called one of the biggest raiders, Asher Edelman, and managed to talk myself into a job as his right-hand guy at Plaza Securities Corp.
It was an amazing experience. I was not prepared; I had been a third-year associate at Merrill Lynch with no practical experience. I don't think Asher realized how unprepared I was, but I learned quickly on the job. I stayed for 3½ years, which made me one of his longer-term employees.
I caught the bug of activist investing working with Asher. We were convinced that we were doing something that was productive for the economy. These were underperforming companies and they were clearly worth much more. They needed a catalyst to address the undervaluation.
After a decade doing your own deals, what compelled you to launch JANA? I started looking at the public markets and saw that companies were generally trading at significant discounts to their ultimate private market values. No one was doing activism at the time; this was in 2000.
After I set up JANA, I remember walking around to potential investors to describe my investment strategy — an event-driven fund with activism as a subset, a tool to be used where appropriate — and I was told that this wasn't a strategy and no one would give me any money.
Describe JANA's investment approach. The strategy is long/short and is defined as value plus catalyst.
We invest in basic industry companies that have recurrent cash flow characteristics that we feel are inexpensive (compared) to after-tax free cash flow, where there is a margin of safety at the level we are invested in. It's a very fundamental approach.
The second requirement is that there has to be a catalyst. There is a pretty wide range of catalysts, generally corporate-type events like restructurings, recapitalizations and spinoffs. Then sometimes we'll be the catalyst.
So that's where JANA's activism comes in? The activism gets a lot of attention, but it's the minority of what we do. Activism typically is about 30% of the exposure of our flagship fund (JANA Master Fund Ltd.), about 45% of our more concentrated JANA Nirvana Fund, and 100% of the co-investment fund, JANA Strategic Investment Fund. The latter requires a big-ticket minimum investment for our institutional clients, which we are very selective about allowing into the fund.
Having the drawdown activist-only fund is important because it partners with the other JANA funds and that gives us much greater firepower to invest in individual situations. It's what enabled us to put $1.2 billion into our current campaign with Agrium.
What characterizes JANA's brand of activism? One is that we aren't an activist-only investor. Activism is one tool among many. We can be very discriminating about when and how we use activism approaches.
Second, we are very disciplined. The rubric I came up with is VCubed to encompass the three characteristics we insist on before deploying an activist campaign: value; votes; variety of ways to win.
So with value, we have to be comfortable that we have a margin of safety and that protects our downside. We have to be sure that we have shareholder voting support. And we need to have a variety of levers to pull because we don't want to be dependent on just one potential outcome.
So about the third V, the variety of approaches? On the spectrum of activists, JANA is not on the hostile end. We try very hard to work behind the scenes and always approach companies privately at first. We try to give management the opportunity to be the hero. We encourage them to take our ideas (about change) and make them their own. We never get into personality battles. It's always just about business. It's not a mudslinging contest even if it ends up in the public domain.
Has mud ever been slung at you or JANA? Not typically. Recently, in this Agrium situation, the CEO (Michael M. Wilson, who also is president) got on TV, unprovoked, and went a little nuts. He said that I personally was lucky because I invested in his company and that all of our company's success was just luck. It was ridiculous.
And you remained silent? JANA just said “it's not about you or me, Mike. It's about what's best for the company.”
Is that code of conduct part of JANA's formula for success? We face the same investment bankers and lawyers across the table all the time and have done so for many years. We know all of them and are friends with some of them.
We know what they are going to tell their corporate clients about us ... their advice is to try to find some common ground with JANA.
We're finding that more and more companies will do that. They don't want to fight because they know there's no point to it and all they're going to do is alienate their shareholder base. That's a big evolution in the activism space today.
Last year, we had three big companies work with us without a fight: El Paso Corp., Marathon Petroleum Corp. and McGraw Hill Cos. Was there a lot of back-and-forth? Yes. But ultimately, we came to common ground.
This article originally appeared in the April 1, 2013 print issue as, "Serious activist".