WATCH OUT

10.03.13

Activist Investor Dan Loeb Tagets Auction House Sotheby’s

In another one of his now-famous “poison pen” letters, activist investor Dan Loeb aims to shake up storied auction house Sotheby’s
BID Chart

BID data by YCharts

Most bigtime hedge fund investors are interested in big brands. But Dan Loeb, the billionaire activist investor, is more interested in shaking up the companies behind them than in acquiring the products they produce. In recent years, Loeb, founder and proprietor of Third Point has gone and acquired stakes in companies like Yahoo! and Sony, and then encouraged management to make significant changes. At Yahoo!, Loeb helped install new CEO Marisa Mayer and then sold most of his stake after the stock appreciated significantly.

On Wednesday, Loeb announced his latest target: Sotheby’s. Loeb, who already owns a stake in the auction house, released another of his acid-tipped letters. This one was aimed squarely at Sotheby’s CEO William Ruprecht.

Loeb’s letter details what he sees as the failings of Ruprecht and the company management. The bill of particulars: too much focus on high-value lots, the lack of a good digital strategy, and not enough emphasis on the contemporary and modern art market. (On Wall Street, you can never be too money. But Ruprecht is apparently too Monet for Loeb).

Loeb has long turned his scathing pen against what he sees as excess and perfidy on the part of CEOs. In his letter, Loeb caustically crows that “We see little evidence justifying your 2012 total compensation of $6,300,399 in both salary and PSU awards valued at over $4 million.” And, as is typical of a Loeb letter, he goes after the goodies that corporate bigwigs routinely get. He lambasted the “perquisite package that invokes the long-gone era of imperial CEOs: a car allowance, coverage of tax planning costs, and reimbursement for membership fees and dues to elite country clubs.” Loeb specifically mentions a dinner at a farm-to-table restaurant in New York where he claims “Sotheby’s senior management feasted on organic delicacies and imbibed vintage wines at a cost to shareholders of multiple hundreds of thousands of dollars.” That restaurant, according to the Wall Street Journal, was Blue Hill in Westchester, and that the bill was not hundreds of thousands of dollars.

This style, once dubbed hedge-fund populism by The New Yorker, has made Loeb popular outside the typical hedge fund circle. He’s a rich, powerful guy who doesn’t hesitate to speak truth to other rich, powerful guys. Loeb once went after the CEO of Salton, Inc. for attending the U.S. Open, and the head of Star Gas Partners for having a mansion in the Hamptons (and for putting his 78 year old mom on the board). He famously attacked the son-in-law of the CEO of Intercept for playing golf during business hours.

Of course, it’s not that Loeb disdains the good life. He makes hundreds of millions a year and bought a $45 million apartment in the billionaire motel at 15 Central Park West. But Loeb has come by his riches by virtue of producing returns for his investors. He gets cheesed off when CEOs live a gilded life while their shareholders (including him) suffer.

Typically, activist investors put their money where their mouth is. When they propose a change in strategy, or an asset sale, they’re hoping it will boost the value of their own shares. Loeb is certainly hoping that Sotheby’s will now take action to make the stock rise. But in going after Sotheby’s, Loeb may be also seeking to profit indirectly. One of Loeb’s complaints is that Ruprecht does “not fully grasp the central importance of Contemporary and Modern art to the Company’s growth strategy, which is highly problematic since these are the categories expanding most rapidly among new collectors.” Loeb should know. He’s one of the biggest collectors of art on Wall Street – and he favors contemporary and modern works.

Here’s the irony. As the chart above shows, Sotheby’s has been on a tear. The company’s stock price has nearly doubled to over $50 a share. The global one percent are spending freely on art. The company is boosting its presence in Asia. It has also listed for sale its Manhattan headquarters, which is expected to go for $600 million.

But Ruprecht has a tough task in fending off Loeb, who is now the company’s biggest single shareholder. Other activist investors like Richard McGuire and Nelson Peltz also own significant stakes. And despite their stock price increase, Loeb does have a point. Sotheby’s has focused more on the high-end market, and lost ground both in international markets and online.

Sotheby’s CEO may have a difficult time getting Loeb to see the, um, big picture.