Loeb Fires Latest Salvo In Effort To Crash Exclusive Sothebys Board


Activist investor Daniel Loeb let loose another salvo in his war of words with the ever so puritan establishment icon on whose board of directors he is trying to crash, Sothebys (NYSE:BID).

“Re-invigorate” company: Loeb

In a letter to shareholders of the venerable high end auction house, Loeb promoted himself along with two other director nominees for election to the board so as to “re-invigorate” the company.

Loeb makes the argument that while the general market environment for high end auctions has improved, Sothebys (NYSE:BID) has failed to properly capitalize on these opportunities. “Sotheby’s has lost market share in highly profitable areas like Contemporary Art while its margins have badly deteriorated,” Loeb wrote. “We believe the Company’s slide is a consequence of failed leadership by a Board of Directors who collectively own a scant 0.87% stake in the Company. Their lack of ‘skin in the game’ has led to a dysfunctional corporate culture overly focused on short-term metrics such as auction volumes at the expense of long-term investment…”

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Citing the “consequences of poor corporate governance and malfunctioning board processes,” Loeb pointed out that “Sotheby’s sorely lacks innovation and creativity at its most senior levels and requires an infusion of leadership, accountability and transparency.”

Sothebys: The Poison Pill

Loeb put into perspective the company’s recent poison pill defense strategy by attacking Sotheby’s board and management. “Perhaps this paltry ownership stake explains the entrenched Board’s responses to Third Point’s attempts to improve the Company.” Citing an October letter to the CEO, William Ruprecht, Loeb noted that Sothebys (NYSE:BID) “had not done enough to keep pace with its largest competitor in many arenas. While claiming to embrace a dialogue, the Board adopted a poison pill only two days after we delivered our letter. Pulling up the drawbridge with this legal relic showed shareholders that this Board’s paramount interest is in ensuring its members’ status rather than doing its job of maximizing stockholder value.”

Loeb also addressed the culture of excess at the firm.  “Why is Sothebys (NYSE:BID) spending more money to achieve worse results?” Loeb asked.  Five years after the economic crisis, Loeb says a “culture of excess has returned. Sotheby’s is spending more than ever on agency direct costs, marketing, salaries, and G & A while returning lower earnings per share to investors.”

Attacking an issue of corporate integrity, Loeb argued “the most distressing element of Sothebys (NYSE:BID) compensation practices is its lack of transparency in communicating how these awards are determined, despite shareholders’ pleas for more information. We are not aware of any unique aspect of Sotheby’s business that requires shrouding fundamentally important information about management compensation and believe shareholders should not stand for the Company awarding its legendarily generous compensation packages without transparency.”

Loeb reveals his prescriptions

Loeb closed the letter by identifying the positive position nature of the company brand and revealed solutions.  “Sotheby’s sits at the very top of the luxury pyramid and, while its competitors are laser-focused on the consumer experience and their brand, Sothebys (NYSE:BID)’s appears indifferent. Compared to the hyper-articulated messages of its luxury peers, it is unintelligible: exactly what is Sotheby’s today?”

Then the “clear opportunities for growth,” were identified what might be considered rather pedestrian online sales and brand extensions.  The prescriptions included:  Investing in data technology to record private sale and auction inquiries to promote cross-selling, improve customer service, and increase volume. Investing in front-end technology to facilitate online sales, increase customer engagement, and burnish the Sotheby’s brand. Investing in long-term talent development and cultivate numerous points of contact within Sotheby’s so that art buyers become clients of the Company, not just the individual salesperson. Initiating a greater number of curated auctions and exhibitions to leverage Sothebys (NYSE:BID)’s client base and relationships. Using its trusted position as advisor to engage in both auction and private sales to represent artists’ estates. Using its capital more aggressively, sometimes jointly with trusted partners, to secure works for private sale and auction. More aggressively seek to monetize Sothebys (NYSE:BID)’s deep intellectual property in its core markets through more active financing and principal investing. Develop a robust approach to smaller transactions to compete more effectively with Christie’s.

Loeb ended by wondering why his firm’s nominees were not being given more significant consideration.  “The Company’s recent assertion that our other nominees would not add relevant expertise is a baffling conclusion since (with the exception of Mr. Loeb) the Board failed even to interview them or return phone calls,” Loeb wrote.  “We doubt that the Directors could possibly understand the breadth and depth of our nominees’ relevant experience without ever meeting them. This dereliction of an essential duty – to evaluate potential directors fully – again demonstrates this Board’s lethargic approach to diligence and fact-gathering. We believe it is emblematic of the flimsy process and lack of rigor they seem to bring to their service.”

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)www.valuewalk.com
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