by Stephen Foley in New York, Financial Times, 6 maggio 2014
Sotheby’s, the 270-year-old auction house, is to give board seats to Dan Loeb and two of his nominees after succumbing to months of pressure from the activist hedge fund manager.
The climdown came on the eve of a shareholder vote in wich Mr Loeb’s candidates were expected to win considerable support and represents the latest victory for activist hedge funds, wich are wielding more power than ever before.
It also presages a shake-up at Sotheby’s, wich Mr Loeb has characterised as “an old master painting in desperate need of restoration”. Mr Loeb’s hedge fund Third Point, wich holds a 9.6 per cent stake in the auction house and is its biggest share-holder, wants to push it to improve its online sales and to take on Christie’s dominance of the contemporary art market.
The arrival of three previously hostile board members could add to pressure on Sotheby’s chief executive William Ruprecht, whom Mr Loeb once accused of “living a life of luxury at the expense of share-holders”. Mr Loeb has since dropped his demand for Mr Rupprecht to be replaced.
US companies have increasingly invited activists and their nominees in to the boardroom over the past year, rather than face a damaging public election campaign. ValueAct was granted a board seat at Microsoft and Carl Icahn was given two at Hologic: Additionally, companies are taking on activist’ recommendations for independent board members.
Activists have a record 75bn dollars under management, wich gives them the power to take on larger companies. Institutional investors are also increasingly supporting moves to shake up entrenched boards.
The details of the agreement between Sotheby’s and Mr Loeb, wich is expected to be published today, is likely to include a clause that prevents the hedge fund manager from making any further public criticism of the company.
In a statement yesterday, Mr Loeb said: “We see ourselves not as the Third Point nominees but as a Sotheby’s directors, and we expect to work collaboratively with our fellow board members”. As recently as last week, Sotheby’s was arguing that none of the three was qualified to join the board while criticising Mr Loeb’s record as a director of public companies.
Late on Friday, a Delaware judge sided with Sotheby’s in a dispute over whether Mr Loeb should be allowed to increase his stake beyond 9 per cent. A poison pill capping him at 10 per cent was Justified to prevent his “creeping control” according to the ruling.
At a hearing last week, it was revealed that Sotheby’s advisers believed the vote was too close to call and Mr Loeb had a stong chance of winning board seats. Also joining the board will be Harry Wilson, a corporate restructurind adviser, and Oliver Reza, head of the luxury jellewer, the House of Alexandre Reza.
Free choice beats a forced option. But sometimes Plan C is needed. Sotheby’s shareholders have come to appreciate this in recent months. Yesterday, the New York- based auction house settled its proxy fight with activist investor Dan Loeb. All three of the gadfly’s board nominees will join the board; Sotheby’s will keep its 12. With the fierce fight raging between the combatants, Sotheby’s shares have slipped a tenth this year (even adjusted for a large special dividendi) – signalling little enthusiasm about either side’s turnround proposals.
Sotheby’s management has been playing catch up since last summer, when Mr Loeb’s Third Point fund and another firm, Mercato capital, began building stakes. A new chief financial officer was brought in, and at least 325 m dollars of dividends, buybacks and other initiztives to return cash to shareholders were announced. That the company cede three board seats shows that it remained afraid of further rebukes from shareholders.
How excited should investors be now that Mr Loeb is part of the management? A recent trial over Sotheby’s takeover defences shows some controversial behaviour on his part.
Mr Loeb represented himself as in charge of Sotheby’s months ago. In emails he referred to waging “holy jihad” against “Sotheby infidels”. This does not suggest his business ideas for Sotheby’s are bad but his image has been tarnished just as he becomes the face of a consumer-oriented company.
Meanwhile, Sotheby’s faces complex commercial issues about doing business in Asia, new digital opportunities and exstendind its brand. These all go deeper than just returning cash. By themselves, neither the status quo nor Mr Loeb seem adequate. But Sotheby’s shares traded up 2 per cent or so on the settlement. There is hopoe that the two can put the awkwardness aside and work together.