George Lindemann Journal by George Lindemann "Bare Knuckles at Sotheby’s Auction House" @nytimes By ALEXANDRA STEVENSON and MICHAEL J. DE LA MERCED
Michelle V. Agins/The New York TimesAndy Warhol’s “Liz #1 (Early Colored Liz)” on the block at Sotheby’s, which faces a shareholder challenge on May 6.
Directors of Sotheby’s gathered in their wood-paneled boardroom with an urgent goal: how to mollify Daniel S. Loeb, the outspoken hedge fund mogul who is the auction house’s largest shareholder.
Yet on that day, in late February, even as the board was debating whether to give the investor the two board seats he had demanded, Mr. Loeb suddenly struck. He nominated three director candidates, officially declaring war against the art world stalwart.
That battle — being closely watched in Manhattan socialite and art circles as well as on Wall Street — is now heading to its final stages as both sides lobby other shareholders before the company’s annual meeting on May 6.
On Thursday, Mr. Loeb gained a significant advantage as the influential proxy advisory firm Institutional Shareholder Services recommended that shareholders vote for two of the three board nominees he has proposed, including himself. (Glass-Lewis, I.S.S.’s rival, is, however, supporting the Sotheby’s slate.)
Michael Nagle for The New York TimesWith a 9.6 percent stake, the mogul Daniel S. Loeb is Sotheby’s biggest shareholder.Mr. Loeb, 52, is no stranger to no-holds-barred corporate battles, but this one is different in several ways. For one, it is almost as much a test of his reputation as an art aficionado as it is of his skills as an investor.
Known for his focus on contemporary and feminist art, Mr. Loeb has regularly made ARTnews’ list of the 200 biggest collectors. Works that have graced his Manhattan office or homes include a seven-foot-wide metallic pink-and-blue Jeff Koons egg — which he reportedly sold for $5.5 million — and a Martin Kippenberger sculpture of a crucified frog.
As part of its defense, Sotheby’s has publicly questioned Mr. Loeb’s art expertise, irking him in the process.
For Sotheby’s, the hedge fund challenge comes as the 270-year-old auction house is grappling with a seismic shift in the business of selling art. Fierce competition and the rapid sprouting of new millionaires and potential clients in emerging economies like China have forced auction houses to reconsider their traditional models.
“Sotheby’s is like an old master painting in desperate need of restoration,” Mr. Loeb has argued.
The battle is reverberating not just among investors but also within the exclusive and close-knit circles of the art world. Some have questioned whether Mr. Loeb, as an upstart, is doing what’s best for the business of art.
“I think what people may be concerned about is that although he is a significant collector, his primary focus is finance and he is not an art world insider,” said Jeff Rabin, a co-founder of the art consulting firm Artvest Partners.
Founded in London in 1744 to sell off several hundred rare books, Sotheby’s has been one of the most prestigious names in the art world. It is the oldest listed company on the New York Stock Exchange.
Yet it was hit hard during the financial crisis. For the last year, activist investors have circled the company, anticipating a broader shake-up of the art market.
“The big question for Sotheby’s is how to adapt to a changing market without losing what makes them special and different,” said John D. Shea, the chief executive of Proxy Mosaic, a firm that advises shareholders in activist situations.
To Mr. Loeb, Sotheby’s has not adapted quickly enough, leaving it ripe for the sort of corporate agitation that has made billions for himself and investors in his firm, Third Point. His playbook: buying a large stake in a company, and using that position to call for shifts in strategy and, often, board seats.
According to Mr. Loeb, Sotheby’s has fallen behind its chief rival, Christie’s, in recent years, especially in the Impressionist and Modern art beloved by today’s mega-collectors, like hedge fund moguls. For example, while Sotheby’s reported its biggest-ever night of contemporary art auctions in November, with $390 million in sales, Christie’s equivalent night fetched $691 million in sales. (Christie’s, however, is privately owned by the French businessman François-Henri Pinault and does not report financial results.)
Mr. Loeb has accused Sotheby’s of rebating the fees its takes for selling multimillion-dollar works, while also taking less of the buyer’s fees to attract more business. He has taken issue with the auction house’s strategy of focusing on top clients and headline sales. He has even criticized board members’ relatively low holdings of their own company’s stock.
In Sotheby’s view, Mr. Loeb has disrupted its business for months by contacting major employees and positioning himself as their new boss, while also suggesting that prominent art world figures consider becoming the auction house’s chief executive.
In the fall, he met with Jeff T. Blau, chief executive of the Related Companies, to discuss a possible move to Related’s Hudson Yards complex or the Time Warner Center, according to people briefed on the matter.
Company officials have also complained that Mr. Loeb has sometimes misunderstood the business. Moving Sotheby’s out of its current headquarters, for example, would make life difficult, given how customized it already is for the auction house.
And they have alluded to accusations that Mr. Loeb has committed “greenmail,” the frowned-upon practice of buying up big stakes in companies and then forcing them to buy the shares back. After winning an activist campaign at Yahoo — one of his biggest victories to date — the Internet company bought back the majority of Mr. Loeb’s stake a year later for $1.2 billion, yielding a significant profit.
Tyrone Siu/Reuters“Bloodline: Big Family No. 3” by the Chinese artist Zhang Xiaogang, on preview at a Sotheby’s auction in Hong Kong this month.Though the billionaire investor first met with Sotheby’s last August, he came out swinging in October, when, in a typically Loeb-like letter, he disclosed a 9.3 percent stake. He now has a 9.6 percent stake.
He accused the auction house’s chairman and chief executive, William F. Ruprecht, of having outstayed his welcome while being paid a salary that “invokes the long-gone era of imperial C.E.O.s.” Ultimately, he demanded Mr. Ruprecht’s resignation.
Sotheby’s responded by instituting a poison pill, a defense that would limit activist investors from owning more than 10 percent of a company, a move that Mr. Loeb sneered was a “relic of the 1980s.”
Unusually, Mr. Loeb then went quiet, even as another hedge fund manager, Mick McGuire of Marcato Capital Management, announced a multipronged plan for the company to generate $1.3 billion in cash for shareholders. Mr. McGuire, who has a 6.6 percent stake, said this week that he would vote with Mr. Loeb at the annual meeting.
By January, Sotheby’s announced its own initiative to return $450 million to shareholders through dividend payouts and stock buybacks, after concluding a financial review initiated by its new chief financial officer, Patrick S. McClymont.
“We spoke with many of our shareholders, and we asked people for their thinking on these topics,” Mr. McClymont said at the time.
Privately, Mr. Loeb was holding talks with Mr. McClymont and Domenico De Sole, the dapper co-founder of the luxury clothier Tom Ford and Sotheby’s newly installed lead independent director. By winter, the hedge fund manager had dropped his demand that Mr. Ruprecht resign, a matter of some satisfaction for the company.
Sotheby’s offered to make Mr. Loeb a director and to give him plum board committee assignments, including its nominating committee. But Mr. Loeb, irritated by what he perceived was a disinterest in listening to him, argued that a single directorship could not drive home real change, and repeatedly demanded two seats.
Now the two sides are contesting three board seats.
Mr. Loeb has nominated himself and two associates, including Olivier Reza, a former investment banker whose jeweler family has done business with Sotheby’s. The auction house’s slate includes Jessica Bibliowicz, a financier and daughter of Citigroup’s former chief executive, Sanford I. Weill, and Robert S. Taubman, whose family rescued Sotheby’s from a hostile bid in the 1980s, but whose father was convicted in a big price-fixing scandal a decade ago.
Each side has fallen into the timeworn rhythms of a corporate proxy fight, flinging attacks at each other on an almost weekly basis. In its most recent counterpunch, Sotheby’s disclosed on Wednesday its preliminary first-quarter results, including a 34 percent jump in Impressionist and contemporary sales from the same time a year ago. Overall, net auction sales rose 40 percent, to $730 million, while the company’s overall loss narrowed to about $6 million.
In its report on Thursday, I.S.S. wrote that while Mr. Loeb’s plan lacked a solid vision, both his and Marcato’s critiques still had merit. “In the particulars of their criticisms of things like commission margin, there is credible reason to believe their larger criticism about strategic myopia has some credibility,” the advisory firm wrote.
To some outsiders, Sotheby’s seems to be receptive to some of its critics’ recommendations. The question is whether its executives are making certain changes fast enough.
“There is a lot of minutiae with this proxy battle,” said Oliver Chen, a luxury goods analyst with Citigroup. “But there are a lot of big-picture questions — for example, ensuring that the model has another 100 years ahead of it.”