Dan Loeb’s doomed Sotheby’s campaign

October 4, 2013

Dan Loeb is going to lose his latest fight, at Sotheby’s. That’s because it’s a Sony, not a Yahoo.

To recap: on Monday, Loeb filed his broadside against the auction house, where he said that he holds a 9.3% stake in the company, and called for the resignation of Bill Ruprecht, its chairman and CEO. It’s worth comparing Loeb’s letter to Sotheby’s with his May letter to Sony, or his September 2011 letter to Yahoo.

The tone of Loeb’s Sotheby’s letter is significantly harsher than the tone he took with either Sony or Yahoo: in those cases, while he was critical, he avoided getting personal in the way he’s doing with Ruprecht. Loeb’s latest attack, by contrast, concentrates on things like Ruprecht’s salary, and the amount of money managers spend at swanky restaurants — juicy details, to be sure, but hardly of strategic importance.

That kind of ad hominem attack was never going to be well received — and today Sotheby’s announced, to no one’s surprise, that it was retaliating with a classic poison-pill defense. Translating from the corporatespeak, Ruprecht is telling Loeb, quite simply: “you want a fight? OK, you’ll get a fight”.

Loeb concentrates on Sotheby’s competitive position with respect to Christie’s, which is owned by French billionaire François Pinault. Pinault is an avid collector of modern and contemporary art, and he has turned Christie’s into a powerhouse in that sector — which also happens to be the hottest sector of the art world right now. Loeb knows the art-auction business about as well as he knows the music business, which is to say that he knows what’s hot, and he wants to ride the trends. “Sotheby’s success,” he writes, “will be defined in large part by its ability to generate sales and profits in Contemporary and Modern art, as this is where the greatest growth potential lies.”

Sotheby’s is no slouch in that business. Just today, it announced that it is going to sell a major Warhol disaster painting, which is very likely to set a new auction record — Warhol’s record could easily be broken, and even possibly the all-time auction record as well. The announcement features some classic auction-house hyperbole, saying that Silver Car Crash (Double Disaster) “takes its place alongside paintings such as Pablo Picasso’s Guernica and Théodore Géricault’s The Raft of the Medusa as one of the definitive masterpieces of history painting”. But it actually stops short of the kind of language that Christie’s employs in its own press releases. Here’s the announcement of Christie’s own Warhol, which will appear alongside a big Koons sculpture and be sold a day before the Sotheby’s Warhol:

Christie’s evening sale in November will offer a unique dialogue between two masters of Pop, Andy Warhol with Coca-Cola (3) and Jeff Koons, with his Balloon Dog (Orange). Two different generations of Pop artists standing side by side; Andy Warhol is the father of everything we know about Pop Art and Jeff Koons is his anointed successor. Both create objects which are totally universal and loved by the public, truly POPular in that sense.

(Bizarre capitalization in the original, along with the subtle — and untrue — suggestion that somehow Warhol anointed Koons as his successor-in-pop.)

Warhols aside, it makes sense that Sotheby’s, as a storied company being run to last in perpetuity, should naturally behave differently than Christie’s, which is a billionaire’s plaything. Indeed, when Loeb first revealed his interest in Sotheby’s back in September, I thought that was his end-game: that he was looking to shop the auction house to some other billionaire. (Bernard Arnault, perhaps, or maybe even Larry Gagosian.)

Monday’s letter, however, shows that Loeb is thinking about keeping Sotheby’s public, while attempting to oust the current senior management. That’s a move akin to central-bank currency interventions: you need a lot of firepower, and you also need the trend on your side. In this case, Loeb’s arsenal has already been seriously depleted by the poison-pill defense — and shareholders aren’t particularly likely to want to side with him, not when Ruprecht’s performance has delivered a share-price rise from less than $30 at the end of last year to move than $50 today.

If you look at the success of Loeb’s strategy at Yahoo, it was based on applying astonishing leverage: with control of just 5% of the company’s shares, Loeb first managed to get himself multiple seats on the board, and then used those seats to astonishing effect, overriding the chairman’s preferences and effectively installing his own nominee as CEO — the person who could achieve the fastest run-up in the share price, after which he could exit with a large profit. In order to execute that kind of strategy, your relationships with the company and its governors can’t be personal and adversarial: you have to persuade them that your interests are aligned.

And it seems obvious to me that Loeb isn’t going to persuade the Sotheby’s board that he knows best how to run Sotheby’s, any more than he persuaded the Sony board that he knows best how to run Sony. Instead, the Sotheby’s board is going to close ranks behind Ruprecht, defending itself from a hedge-fund manager who never has the genuinely long-term health of a company at heart.

What Loeb wants is a quick boost in the Sotheby’s share price: that’s why he’s concentrating so hard on the white-hot areas of contemporary art and China. Given that, it’s going to be very easy for Ruprecht to persuade the board that he stands for something more permanent, more noble, and, ultimately, more likely to survive the when-not-if moment at which the Chinese/Contemporary art bubble bursts.

Of course, it’s entirely possible that Loeb will make money on his investment, if his shares rise in value. But I very much doubt that he’s going to succeed in ousting Ruprecht, and the chances are that he will quietly exit his position once the failure of his strategy becomes obvious. After all, he’s an activist investor. And if he can’t shake things up at Sotheby’s, he’s going to move on to another company where he can.

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