The Orange Balloon Dog

by Don Thompson

  It is hard to overemphasize Meyer’s importance to the auction house or the shock of his departure. He had auctioned three works of art for more than $100 million each: Edvard Munch’s The Scream in 2012, Andy Warhol’s Silver Car Crash (Double Disaster) in 2013 and Pablo Picasso’s Boy with a Pipe in 2004. Meyer, rather than Ruprecht, was the public face of the house and chief dealmaker. Many of Sotheby’s major clients had primary allegiance to Meyer’s advice. The loss involved more than his clout. Some collectors relied on a default option, doing what had minimized uncertainty before, relying on Meyer’s advice and Sotheby’s brand when a major consignment or purchase was involved.

  The default option is also in play in the way collectors tour an auction preview. Meyer was responsible for specifying Sotheby’s New York auction preview layout; where the location a work is hung signals its status. The feature works face the gallery entrance, to the centre or left, or are hung in an alcove to the right of the main entrance—usually with works in that order of importance. Collectors always found Meyer standing just to the left of the entrance. They would view works in the order of their importance, as signalled by location.

  Less important (and less expensive) work at Sotheby’s preview was grouped in separate galleries to the extreme left of the entrance or at the back of the room, and shown by other auction specialists. Meyer seldom ventured to the back of the room.

  More casualties followed. In November 2014, William Ruprecht announced his resignation. That was probably inevitable; Ruprecht represented the traditional culture of Sotheby’s, the auction world version of a gentlemen’s club. Loeb represented the business culture of town hanging.

  Two weeks after Ruprecht left, Christie’s CEO Steven Murphy announced he was leaving his position, nominally at the end of December but in effect immediately. Murphy had occupied the position for three years and had been responsible for investing $50 million in Christie’s online presence and for negotiating the company’s entry into China—the actions that Ruprecht was criticized for not taking. The obvious connection between the two departures was that lavish guarantees and rebates of buyers’ premiums had defended the auction house’s market share and gained media attention but produced little profit. A secondary explanation for Murphy’s departure was that his restructuring created irreparable animosity within the firm.

  Murphy was replaced by Patricia Barbizet, who is also the CEO of François Pinault’s holding company Artémis. She is vice-chair of the board of Pinault’s luxury goods holding company Kering, and a director of French groups Total and PSA Peugeot Citroën. Barbizet was seen as a caretaker CEO. In December 2016 she ceded the role to Guillaume Cerutti, president of Christie’s Europe.

  After a four-month search following Ruprecht’s departure, Sotheby’s appointed forty-nine-year old Tad Smith as his successor. A Harvard MBA, Smith had been CEO of Madison Square Garden. Before that he was an executive in media company Cablevision. He had no background in the art world and no known role as a collector. US Securities and Exchange Commission filings indicated that Smith was offered first-year compensation worth a potential $20 million, most in the form of stock options dependent on how the firm’s shares performed through 2020. The award was potentially three times Ruprecht’s compensation in his final year. Until Smith, the most famous art-world outsider to enter the executive ranks of the auction business from the entertainment sector was Steven Murphy, who came from EMI Music.

  In a letter to employees, Smith said: “I ask you to embrace the possibility that lessons from creative industries may be applied to Sotheby’s.” New York dealer David Nash of Mitchell-Innes & Nash characterized the statement as “an example of thinking of auctioning as a merchandising machine, when the CEO can’t tell the difference between a Manet and a Monet.”

  In February 2014 both sides agreed to end their legal and public relations campaigns. Sotheby’s announced it had spent $20.1 million defending itself against the Loeb assault. There must have been a lot of well-compensated New York lawyers. As part of the settlement, Sotheby’s granted seats on the auction house board to Loeb and two of his associates.

  In January 2015, Smith announced that he had paid $85 million to acquire Art Agency, Partners (yes, with a comma), a two-year-old art advisory firm founded by Amy Cappellazzo, former co-head of contemporary art at Christie’s, and Allan Schwartzman, a former dealer and adviser. Cappellazzo and Schwartzman were made co-heads of the fine arts division, ranking above all the auction house chairmen worldwide.

  The purchase amount included $50 million paid immediately, essentially as a signing and retention bonus. There would be additional payments up to $35 million if financial targets were met over a five-year period. Analysts found it hard to understand how the house could make money on the purchase, given the huge upfront payment.

  In a conference call with analysts and investors, Tad Smith was joined by Cappellazzo and Schwartzman. They said the acquisition was part of a larger strategy to increase the auction house presence and revenue in advisory services, to expand its services in art consulting, private purchases, art-related estate planning, asset portfolios and art investment. Cappellazzo later added, “Now we’re just a big transactional organization that has an advisory division, kind of like Goldman Sachs and UBS and all those guys.”24 Sotheby’s has more than three hundred employees; the idea that it did not already have the in-house skills to perform the functions for which AAP would now be so well compensated is telling. The stock market approved of the acquisition—Sotheby’s stock rose 7.2 percent on the day of the conference call.

  The purchase was innovative, apparently motivated by an art world where the richest 1 percent of Sotheby’s art customers purchase as much as the remaining 99 percent. It was not clear how the new fees involved would be received by a 1 percent that previously received the services free. How valuable the advice would be, coming from advisers who were seen as biased toward transactions through Sotheby’s auctions and private dealing, was also not obvious. The wording of the announcement suggested that on occasion, Cappellazzo or Schwartzman might purchase a work for a client from Christie’s. Schwartzman said that possibility was understood and accepted by Sotheby’s.

  As an interesting aside, when Cappellazzo was at Christie’s one of her major clients—perhaps the most important—was Dan Loeb.

  The AAP expansion gave Sotheby’s a potential fourth leg to its revenue stream: auction commissions and fees, private sales, income from financing and now advisory fees. The assumption seemed to be that the latter three would be high-margin, to compensate for the auction business which would be the public face of the company but remain low-margin. There is a stumpy fifth leg, revenue from the secondary market art showrooms in London and New York. These remain minor revenue sources.

  One of Sotheby’s first responses to Loeb’s criticisms was to negotiate more capital for its finance unit, for use in auction lot guarantees and art loans. In August 2014, Sotheby’s doubled its credit line from $300 million to $600 million. In June 2015, the auction house paid GE Capital, Corporate Finance, a $2.7-million fee to increase Sotheby’s borrowing limit to $1.3 billion. Sotheby’s Financial Services was in 2016 the largest asset-backed art lender in the world. Bank of America (us Trust), J.P. Morgan Private Bank and Citi Private Bank were bigger asset lenders overall, but much of their lending was against a portfolio that included art with other assets. Christie’s art lending is well below Sotheby’s; it does some art-secured lending but prefers to refer clients to other financial firms.

  Sotheby’s great advantage in art lending is that it is not bound by the same strict compliance rules as banks, and so can move quickly. Sotheby’s doesn’t have to examine financial statements or tax returns, or inquire as to the source of funds that paid for the art. It lends money—much of it to dealers, collectors, and executors of trusts and estates—against the value of the art. If the loan is not repaid the auction house sells the collateral and takes a full commission on the sale.

 
In December of 2015, Tad Smith announced a 9-percent drop in third-quarter revenue, and called for 80 employees (of 1,600) to take voluntary redundancy so the house could achieve “efficiencies.” He said if not enough employees accepted, there would be “involuntary separations.” There were enough voluntary buyouts within ten days. Smith then announced an expensive coup. He hired Marc Porter, chairman of Christie’s Americas and former head of the private sales department at Christie’s, to join Sotheby’s after a year’s non-compete period. Porter had been with Christie’s for twenty-five years.

  In December 2016, without warning, Christie’s postwar and contemporary chairman Brett Gorvy announced he was leaving that auction house after twenty-three years to co-own the rebranded Lévy Gorvy with former Christie’s executive Dominique Lévy.

  The settlement with Loeb focused attention on two issues. Much of Sotheby’s value comes from the fact the auction house is perceived as a seller of luxury goods, involved in what has been called the Moët-and-beluga trade. In auctioning high-end contemporary art everywhere but China, the firm competes only with Christie’s. Bonhams, Phillips and others auction high-priced goods but are not perceived as luxury brands.

  Assume that as Loeb suggested, Sotheby’s cut back on offering buyer rebates and implemented expense-cutting. At the time of the Loeb letter in 2013, Christie’s was almost certainly spending more than Sotheby’s on rebates and promotions, both in absolute terms and as a percentage of sales. If Sotheby’s cut back, would Christie’s follow? If Christie’s did not follow, how would consignors and collectors react? If the result was a dramatic increase in Christie’s market share, would Sotheby’s in three years still be viewed as a luxury brand? Would Sotheby’s be considered equal to Christie’s if the latter’s auction sales were consistently two or three times the dollar value of Sotheby’s? Would Sotheby’s then become just a seller of high-priced goods?

  Christie’s said in 2014 that there were about 150 people in the world who might bid on a $10-million painting. Sotheby’s estimated the number at “about 100.” These are the people who are served Moët and beluga, have trophy art delivered to their homes for private preview and are sometimes offered first-class air tickets to attend an auction. Sotheby’s had better be as willing as Christie’s to do whatever is required to capture those collectors.

  The second issue that now attracts attention is internet sales, an area also emphasized in the Loeb letter. The internet is well adapted to fashion and prestige brands, not so much to luxury. Easy accessibility is a negative for luxury goods, which require time and effort to be deserved. Luxury means that the purchaser has overcome the constraints of daily life and entered into a privileged world of the aesthetic, the cultural and the hedonistic. That privileged world—and any mention of prices—is not found on the internet.

  Can you offer luxury online, and also mention prices? What other luxury good does that? Not Rolex or Lamborghini. Not Gucci, Cartier or Dior. Chanel sells cosmetics online, but not fashion. Miuccia Prada was quoted in Vogue, “We think that, for luxury, it’s [e-commerce] not right. … Personally, I’m not interested.”25 But Christie’s has sold Hermès Birkin bags and Elizabeth Taylor’s multi-million dollar estate jewellery online. Ex-Christie’s CEO Steven Murphy had predicted that the auction house’s business would evolve to one-third live auctions, one-third private sales and one-third online.

  The final question was whether the fight over Sotheby’s would result in a takeover battle and a new, private owner. David Schick, then managing director of investment management firm Stifel Nicolaus and now with Consumer Edge Research in Washington, DC, led the argument that Sotheby’s needs a single owner like François Pinault: someone with wealth and a fascination for art and the art market. Most important, the firm needs someone with no requirement to maximize quarterly profits. Privately owned Christie’s is immune from takeover threats, and does not need to make public its financial statements or the details of its deals. Perhaps equally important, Brett Gorvy can encourage those who work for Christie’s to experiment with new initiatives and make their own decisions, without an occasional misstep risking their career or Gorvy’s.

  Sotheby’s announced its 2015 sales were down about 7 percent compared to 2014. Christie’s announced a 5-percent drop. Postwar and contemporary art for the two was down about 15 percent. Sotheby’s commission margin—its revenue from commissions as a percentage of auction sales—dropped to 14 percent, compared to 21 percent in 2009. The decline was largely due to the auction houses’ “paddle-plus” offers to attract consignments. Sotheby’s dropped its dividend to conserve funds. Analysts predicted that 2016 sales for the two auction houses would be down a further 10 to 11 percent from 2015 levels.

  In April 2016, Cheyenne Westphal—Sotheby’s worldwide head of contemporary art—became the latest in an unprecedented exodus of executives from the auction house. Westphal had been with Sotheby’s for twenty-nine years; Alex Rotter, her former co-head, had resigned in February. Westphal was considered one of the least likely all of all the firm’s executives to ever jump ship.

  Between the resignation of Tobias Meyer and Westphal’s departure, there were thirteen other major departures from Sotheby’s. The group had a total accumulated experience of 330 years. The mass departure was not interpreted as a vote of confidence for Tad Smith.

  It was not apparent whether the shakeup and enormous loss of institutional knowledge that accompanied it stemmed from the demands of activist investors; the accession of Smith; the purchase of Art Agency, Partners; the new role of Amy Cappellazzo; or the decreased bonuses that followed from declining profits. (The executive turnover produced one historic result. Helena Newman, the new chairman of Sotheby’s Europe, became the first female auctioneer to take a major evening sale in New York when she wielded the gavel for the November 2016 Impressionist and modern event.)

  Sotheby’s turmoil and financial performance were reflected in its stock price. In April 2016, Sotheby’s shares dropped to $26.00, down from a year high of $47.28 and down 55 percent from their value when Loeb and the others purchased their stakes. The five activist investors had a combined paper loss of a little under $2 billion on their speculative purchase of Sotheby’s shares. The stock price rebounded strongly later in 2016, but the five still showed a sizeable loss. Toward the end of 2016 Sotheby’s agreed to buy back the Marcato shareholding for a price that was not announced, but was certainly well below what was paid in 2013. The losses and stock price drop meant Sotheby’s credit rating was under scrutiny. If Standard & Poor’s downgraded the company, its credit-line provisions might be breached and the auction house could face a financial crisis.

  In mid-2016 the company had a market cap (total share value) of $1.7 billion; at the beginning of 2017 the cap was $2.2 billion. Either figure left the company within takeover range of a few. The most often-mentioned candidate was Bernard Arnault, a man with a long-term rivalry with Pinault. Arnault is the French owner of luxury brand house LVMH, the former owner of Phillips and the donor of a new private museum in Paris Bois de Boulogne. He has a reported fortune of $37 billion. Other takeover candidates mentioned were the Qatari Royal family and China’s Poly auction house, the third largest in the world.

  In July 2016 an unanticipated suitor emerged. Chinese businessman Chen Dongsheng announced that Taikang Life Insurance Company, where he is chairman and chief executive officer, had become Sotheby’s biggest shareholder. Taikang’s controlling shareholder is China Guardian Auctions, a company that Chen co-founded in 1993 and the fifth-largest auction house in the world. Chen and Taikang have a long-term history in art; the insurance company runs its own gallery in Beijing’s 798 art district.

  Taikang acquired almost 14 percent of the shares through a series of small transactions. The significant acquisition did not significantly move Sotheby’s stock price, even though the increased market volume alerted those watching the stock that something was happening.

  By the fall of 2016 Chen had not issued any
statement as to his intentions for Sotheby’s, except to say that he desired board representation, that he viewed control of auctioneering as important to protect China’s heritage and that he dreamed of recreating China’s cultural aristocracy. In November Sotheby’s announced that a representative of Taikang would join its board of directors, as part of a deal in which Taikang agreed to limit its stock purchaser to 15 percent of the shares outstanding.

  Chen’s involvement offers a strange bridge between the ultra-capitalism of the auction house and China’s communist past. Chen is married to Kong Dongmei, the granddaughter of People’s Republic founder Mao Zedong.

  CHAPTER EIGHT

  FORAGING FOR COLLECTORS AND CONSIGNORS

  A “gladiator sport at the highest level.”

  —Brett Gorvy, formerly Christie’s26

  “If everything seems under control, you’re just not going fast enough.”

  —Mario Andretti, former racing driver

  PRIOR TO THE MID-1990S, MAJOR AUCTION HOUSES WERE MOST CONCERNED with attracting consignments. They searched out and charmed owners of important works. The inducements were the high prices being offered for similar works, the possibility of a catalogue cover and a lavish write-up identifying the consignor, and price guarantees. There is still fierce competition for consignments. But now there is more emphasis on persuading wealthy collectors to buy additional works, and finding wealthy non-collectors to convert.

  Identifying potential bidders used to mean that senior people from Christie’s and Sotheby’s pursued social connections in New York, London and a few other major cities. That guaranteed they would encounter most of the collectors, agents and dealers who mattered. Now an auction specialist is expected to meet thirty new potential clients each year and learn their collecting preferences. As more important Impressionist and modern art resides in museums and long-term collections, specialists have to find collectors to bid on what still appears at auction in order to keep annual sales totals growing. This is the Red Queen phenomenon, named after the character in Lewis Carroll’s Through the Looking Glass. The Red Queen cautions Alice, “It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”27