An activist may be trying to shake up one of the biggest banks in the world — here's what it takes to do it

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Jeff Ubben and his activist hedge fund ValueAct have taken a $1.1 billion stake in investment bank Morgan Stanley, according to filings with the Securities and Exchange Commission released Monday.

While it is still unclear if the stake is going to lead to an aggressive push for changes at the bank, Ubben is best known for shaking up giants such as Microsoft and Adobe. So it's not out of the question.

To get those changes, even if Ubben and ValueAct play nice, is a massive undertaking.

From preparation to building a stake to meeting with company management, an investment by an activist fund takes huge amount of time, money, and even showmanship.

So as we learn more about the ValueAct-Morgan Stanley investment in the coming days, here's a look inside everything it takes for such a huge gamble to pay off — or fall totally off the rails.

Before you get started, here are a few terms you need to know.

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The world of activism is one of the most colorful in investing. It’s full of not only big names and even bigger money, but also some of the most colorful language in the market lexicon.

Here are a few of the essential terms you need to know, and some of the most out-of-the-box:

Proxy fight: The ultimate endgame of an activist campaign. This is the fight for shareholder votes at the company's annual meeting, and a chance to make a big change in one fell swoop.

Bear hug: An offer to acquire a company, meant to force the company to either put itself on the auction block or respond to your private approaches. These are usually leaked with the effect of adding pressure on a company's board.

Poison pill: A way for a company to make it impossible for an activist to acquire enough of a stake to get anything done. The poison pill lets the company issue new stock to shareholders to keep the activist's stake small.

Bedbug letter: Basically the equivalent of taking a schoolyard fight to the teacher. A letter to the Securities and Exchange Commission during a proxy fight that complains the other side is using misleading information — which breaks the rules and can lead to disqualification of the proposal.

Wolf-pack: Piling into another activist's campaign on the investor's side but without coordinating with the other fund.

Greenmail: Basically paying the activist to go away, usually by buying up the fund's stake at a nice premium. It was once more common, but isn't considered very kosher these days.

Start by toughening up.

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In theory: Activist investing is a very public exercise. If you're going to pressure a board of directors into making big changes, you need to be able to get its attention. Of course, with that publicity comes the public's scorn.

Get something wrong or lose some money, and you'll hear about it in the press for years.

In practice: One great way to know what you'll face is to learn the ropes from another activist. Almost every notable activist has come off the tree of a former great. Keith Meister of Corvex Management learned from Carl Icahn; Scott Ferguson of Sachem Head learned from Bill Ackman; Rehan Jaffer of H Partners learned from Dan Loeb.

Find an idea ...

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In theory: Activist investors are actually just very noisy value investors. They start by finding a company that they think is worth more than the stock market is giving it credit for — and then they take matters into their own hands by pressuring a company to shake things up with a breakup or sale or change of leadership.

Activists usually look for a few things — efficient and productive use of capital, proper management incentives, and a strong focus on the business, measures such as return on invested capital, and use of capital for shareholder-friendly practices such as buybacks — to determine where there's room for improvement.

In practice: Ideas can even come from other activists. After Ackman announced a short of Herbalife, calling it a pyramid scheme, Icahn decided to go long on the company, leading to one of the most intense exchanges in investing history.

As investors have poured into the activist game, it is getting harder for fund managers to find unique targets. Often, fund managers wind up in the same investment as other funds, and sometimes they don't agree on a prescription.

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