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The Gavel Drops at Sotheby’s

I heard of many similar conversations—Loeb is clearly doing his own research on Sotheby’s. He has expressed an outsider’s skepticism of the blood sport between the houses, wondering why they can’t hold the line against consignors when it comes to commissions. Instead of using discounts to secure inventory, Loeb argues, Sotheby’s should think more like savvy collectors do. He often says that Sotheby’s should be more like an “art merchant bank,” a boutique institution that combines advisory and financing functions. He wants the company to engage in more direct investment, to “judiciously take principal positions” in the artworks it sells. He has also backed a proposal by another activist shareholder, Marcato Capital Management, that calls for Sotheby’s to use bank financing to expand its art lending. Marcato suggests that the company bundle and securitize its loan portfolio, citing a model developed for Marriott time-shares.

Sotheby’s has already been moving in this direction. In January, in response to Marcato’s proposal, it announced a plan to expand its financial services through a new $450 million credit line. This should allow the company to develop its role as one of the primary money markets for major dealers and collectors. (Peter Brant has made use of Sotheby’s loans, as has Jeff Koons, who borrowed against his own work.)

Loeb told Sotheby’s management that he approved of the financial-services expansion as well as a decision to again consider selling the York Avenue building and other property in London, cash-generating plans that have allowed the company to promise a special $300 million dividend to shareholders. This wasn’t enough to stop him from launching his public campaign, though. Sotheby’s has adopted a “poison pill” takeover defense, preventing Loeb from amassing more than the roughly 10 percent of shares he currently holds, but last week Marcato, which owns 6.6 percent of the company, announced it would be supporting Loeb’s nominations. Sotheby’s stock has remained fairly flat since the activists disclosed their positions over the summer, so they have every incentive to make some noise.

Such board fights often end up turning nasty. Loeb’s October letter described, for instance, an embarrassing six-figure corporate tab at Blue Hill, and Sotheby’s culture could supply him with plenty of additional material. Much of the management team around Ruprecht has been in place since the era of Taubman, whose son still serves on the board. (Recently, the London office held a 90th-birthday party for the disgraced tycoon, though Sotheby’s says the family paid for it.) The financial-services department not only serves the cozy art marketplace but also has been used in the past by top executives. Sotheby’s issued Ruprecht an $850,000 loan to buy his home in Greenwich before he became CEO. State records show that on two occasions, around the time Meyer purchased his $5.5 million condo in 2004 and built his country house in 2009, Sotheby’s issued him loans against artworks by Warhol, Barney, and Meyer’s friend John Currin. (A Sotheby’s spokesman says any loans to employees are subject to “the same rigorous due diligence and underwriting standards” as those to other clients.)

Meyer’s overnight disappearance offers another potential area of intrigue. The timing of his resignation led some to conclude that he and his salary were offered up as a sacrifice to Sotheby’s angry shareholders. Though his compensation was never disclosed, it is believed to have been enormous. “They certainly did invest very heavily in keeping him, and keeping him happy,” says David Nash. But Loeb has denied that Meyer was meant to be the target of his pressure. Though no great administrator, Meyer was an ambitious dealmaker in a company that Loeb says should be making bigger deals, and Loeb has told some that he views the departure as a sign Sotheby’s isn’t capable of retaining top talent.

A source familiar with Meyer’s thinking says he had become frustrated with the public company’s bureaucracy and was attempting to negotiate a more influential place in the hierarchy, something like a creative-director role. But Ruprecht wasn’t interested in giving Meyer the power he wanted. Since leaving, Meyer is said to have expressed a desire to become “invisible,” and he recently put his Manhattan condo on the market, for $17 million. His mental map of the world’s art treasures should serve him well as a private dealer. There are, however, those who think that if Loeb were calling the shots at Sotheby’s, Meyer might return in some sort of rainmaking role.

The next big sales are in May, around the time of the annual shareholder vote. If Sotheby’s once again trails Christie’s by a large margin, says Anders Petterson of the market-research firm ArtTactic, “you are tipping that balance, and the buyers suddenly may exit out Sotheby’s door.” Given the grave danger in looking second-rate in a marketplace built almost entirely on perceptions, Ruprecht and his staff have been forced to take some bigger risks. Sotheby’s offered more than $200 million worth of guarantees prior to last November’s auctions, only a quarter of which were offset by third parties. (A big one went to Steve Cohen, who, in the midst of his insider-trading travails, consigned several works with mixed results.) The company’s latest filings suggest it is moving in a similar direction for its May sales. This is a course Loeb has advocated, so long as it is done intelligently, but it’s a high-stakes game. Even a single bad bet can have a meaningful impact. Last year, Sotheby’s ended up owning a $70 million diamond after a winning bidder failed to make payment—the largest failed guarantee in recent memory.

The market for diamonds is probably more stable than the market for Kippenbergers, but the incident gives credence to the suggestion, made by many in the art world, that in its desperation to prove itself to shareholders Sotheby’s is courting a familiar disaster. It’s generally estimated that there are maybe 100 serious players in today’s art market: The buyers, sellers, debtors, and guarantors are the same people, exposed to the same risks. “The practical reality,” says Michael Plummer, “is that most everyone in finance, even the collectors themselves, distrusts the economic rationality of the art market.” Guarantees are, in effect, bets on the value of art, made at the moment the auction house has the least leverage, because it is in a breakneck race with its competitor. Loeb may cash in his Sotheby’s stock before the downturn comes—but it always arrives, often all at once. The collectors stop buying, and the houses end up with lots of overpriced pictures and red ink. That’s the downside to Sotheby’s position between the billionaires: It’s always the middleman who ends up getting squeezed.