What's going on at Sotheby's?
April 5 2016
Well, it depends who you read. The broad media narrative is of an 'art market in decline', and Sotheby's, who reported a recent fourth quarter loss last year of $11.2m, are apparently suffering as a result. But look more closely at the numbers, and not everything seems as dire. Nevertheless, the stock price is bumping along at around $26 a share, some way of its highs of $46 in the summer. Earlier this year it fell as low as $19 a share.
Much of the media focus has been on Sotheby's new CEO, Tad Smith, who used to run Madison Square Gardens in New York (and very successfully). As a publicly listed company, Sotheby's comes under a lot more scrutiny than Christie's. So I always read the travails of whoever is CEO with some sympathy. I have never met Mr. Smith, but I was pleasantly surprised to see him wandering around the salerooms when I was last at Sotheby's in January, for the Old Master sales. It’s always good to see management ‘on the shop floor’.
But Mr Smith has had an uneasy inheritance. Over the last couple of years we had the former CEO Bill Ruprecht, and indeed the whole of Sotheby's, being bashed repeatedly and publicly by activist investor Daniel Loeb. Loeb’s hedge fund, Third Point, owns around 10% of Sotheby’s, and is the company’s largest single shareholde. You might have thought he’d be more diplomatic, but he seemed to delight in branding the company 'dysfunctional' and like 'an old painting in desperate need of restoration’. The attack was was unnecessary, and really Mr Loeb should have known better. In the art world, and especially in a duopoly, reputations and sentiment matter, and Loeb's message stuck. But in the short term he got what he wanted, for in 2014 he secured a number of seats on Sotheby’s board, and Ruprecht resigned in November that year. Tad Smith was, it seems safe to say, largely Mr Loeb’s appointment.
There's not been a great deal of good news for Sotheby's to celebrate since. The acknowledgement by the company that they will lose money on the Taubman sales got widespread coverage. Strong competition from Christie's for the chance to sell the collection of the late Sotheby's owner, Alfred Taubman, prompted Sotheby's to offer a guarantee of $515m to Taubman's heirs. Personally, I couldn't see the wisdom of Sotheby's taking such a huge punt on the collection of their jailed former owner - it hardly offered the sort of freshness and provenance collectors like to get excited about. That said, the final stand-alone Taubman sale, of his Old Masters, went better than expected, and Sotheby's cash loss on the whole deal will be slight, about $9m ($3m on the sales themselves, and $6m in marketing).
Another recent Sotheby's announcement has led to further head scratching in some quarters; the acquisition of an an art advisory firm, Art Agency Partners, for $50m in cash (and up to $85m in options if all goes well). The first question many asked was; why buy a business whose pitch is seemingly to provide 'independent' art advice to buyers, and then shackle it to Sotheby's? Won't that risk losing that firm's clients? And how could an agency business be so valuable? Evidently, Sotheby's believed that it was hiring the best art sellers in the business, and Amy Cappellazzo and Allan Schwartzman will now effectively head a new department selling everything from impressionist to contemporary. There has been talk of Sotheby's getting more involved in the financing end of the market, especially in private equity.
However, the acquisition of Art Agency Partners has led to a number of high profile departures from the company, the most recent being Alex Rotter and David Norman, two long-standing members of the contemporary and impressionist departments respectively, and just last week Cheyenne Westphal, the ‘Global’ head of contemporary art. Such departures come on top of Sotheby's programme to seek a 5% reduction in head count through a voluntary redundancy programme, which may or may not be connected with the departure of their (and the market’s) best auctioneer, Henry Wyndham.
Why does all this matter? At the top end of the market, both securing high value consignments and engineering sales depends a great deal on longstanding personal relationships. So when you lose a large number of experienced staff in one go you inevitably lose a lot of client relationships too. And worse, who can doubt that many of those who have left the company will soon either set up on their own, or go and join the competition. People don't forget what, and who, they know.
Still, I must confess to speaking from a point of ignorance on how the modern and contemporary market works. It amazes me that the super rich need so many people to help them buy art (many of whom, of course, are on a commission). In the modern and contemporary field it seems a given that you don't just pitch up and buy what takes your fancy.
Anyway, where is Sotheby's going? The worrying thing is that many of those in the company I speak to don’t entirely know. Sotheby's is clearly undergoing some significant changes, at Tad Smith's behest, and it's too early to judge whether they'll work. Time will tell whether the Art Agency acquisition pays off. Historically, Sotheby's has had a tendency to make bold buys like this, and they haven't always worked. There was the acquisition of Butterfields in 1990 for $260m, which was soon offloaded to Bonhams in 2002 for a fraction of that price. The first tie-in with Ebay back in 2002 was a costly disaster (and I'm still not sure how the latest one is going to work). And the purchase of the Noortman Old Master business back in 2006 was always a curious thing; that business is also now closed.
But what would concern me most, were I Sotheby’s shareholder, is the talk from Sotheby's of ‘new metrics’ by which to measure the performance of staff in the future. The problem is, measuring individual performance in the rarefied world of selling art is difficult to do. It’s not like Sotheby’s makes a product that its salesmen then go out sell, all reporting back with measurable performance. Auction houses rely instead on specialist knowledge.
But how do you measure the value of that knowledge? Let’s say that X specialist secures the consignment of an Old Master picture, but it is their colleague Y who actually knows that it’s not a humdrum ‘Spanish School’ picture but an El Greco. The picture may then be sold to a client by colleague Z. The performance of the people doing the consigning and selling could be ‘measured’, but actually it’s Y who has added value, and who is the most important part of the whole business. All of which makes people like me wonder whether Wall Street types ever realise that the art business is very different from most other businesses.
Evidently, both Sotheby's and Christie's are going to have a difficult time adjusting to the end of the cash cow of a ballooning modern and contemporary sector. Despite the media reports, Sotheby's recent quarterly filings painted a somewhat more healthy picture of the business. Overall sales in 2015 were similar to those in 2014. The recent losses are mainly due to one-off transactions. Overall performance seems to be strong enough. That's hardly evidence of a market slump, although Tad Smith did recently describe the market as ‘flagging'. But the good news is that Sotheby’s sells more than just modern art. I'd be fascinated to know how profitable their Old Master department is; I suspect it performs consistently well. Sotheby's might yet find that concentrating on what they've always done, selling stuff (as opposed to financing it) pays off in the end.
Quite how all this ends up for Dan Loeb’s hedge fund I’m not sure. As far as I can make out, Third Point bought a 5.7% share in Sotheby’s in August 2013, when the share price was around the $45 mark. Later, in October 2013 he upped his stake to 9.3%, and at this stage the share price was nearing $50. If those figures are anything like correct, Loeb is currently nursing a 50% loss on his initial investment. And much of it is self-inflicted.