At first glance, Sotheby's (BID +0.00%) might not look like an activist target. It is one legendary half of an industry duopoly, and the stock has performed great recently, up 60% since last October. The art market has been a strong one, too, attracting capital from the ultra-wealthy who may be stock-and-bond averse in today's shaky economic environment. But in the last couple of weeks, reports have swarmed the news feeds regarding mega-activist Dan Loeb's outspoken criticism of the company and its managers. The chief at Third Point has taken a substantial position in the company, and wants a CEO ouster, among other changes. Activist investing has become a 2013 trope, and may bore investors who have heard it all, but is there reason to follow Loeb in on his latest bid?
The high life
According to Loeb, Sotheby's CEO William Ruprecht has been living the life at the expense of shareholders. The investor outlined that in 2009, the company's chairman and CEO had a $143,000 car and driver allowance. In 2010, it was drastically reduced to $25,000, but included a one-time payment to the CEO of $250,000. The company was also reimbursing Ruprecht for taxes related to a country club membership.
Of course, over the same period of time, Sotheby's was enjoying the art market boom and the arrival of emerging markets to the auction house. Last year, the company auctioned off Edvard Munch's "The Scream" for a record $120 million. Just recently, Sotheby's contemporary art night in Shanghai saw the sale of a Chinese oil painting for $23.3 million -- the highest in its genre.
Still, Loeb and other investors lambast the company for its failure to fully capitalize on the Asian art and online markets. Competitor Christie's, though not the first to the trough, has established a substantial online business that does a great job of creating first-time Christie's customers. In short, Loeb wants Ruprecht out and a board seat for himself.
Pick your poison
In its initial response, Sotheby's board decided to use a poison pill tactic, keeping any one shareholder from gaining more than 10% of the outstanding shares. Loeb has no intentions of backing down.
For investors, this is a double-edged sword. It's true that Sotheby's is losing market share to Christie's, and perhaps not capitalizing on emerging markets as much as it should. The luxurious lives and benefits of its executives doesn't help either. But at a time when the company should clearly double down its focus on improving margins and increasing its investment in emerging markets, it is instead fighting an investor and diluting its shareholders. Depending on Loeb's success, this could either be a fresh canvas for the company to choose a new leader, or a drawn-out, mud-slinging fight that just allows for Christie's to steam ahead with little challenge.
At this point, with Loeb's team fully engaged and ready for battle, investors should hope for a swift and relatively harmless victory. Once the activist can move past boardroom drama, he can help name a successor (as happened with Marissa Mayer at Yahoo!) to the throne and, hopefully, realign the company toward brighter days.
