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Sotheby’s Buyout Bombshell: Turning Towards the “Less-Tenured”

Maybe the Sotheby’s buyout bombshell (first reported Friday by Bloomberg‘s Katya Kazakina) shouldn’t have come as a shock: This purge was foreshadowed by CEO Tad Smith‘s cryptic comments in last Monday’s quarterly conference call with stock analysts:

One of the most delightful surprises of the year has been how many excellent, less-tenured staff  appeared on our initial list of high potential talent within our organization. These people are bursting with energy to change the worlds of art, jewelry, cars or wine, and my more senior colleagues and I need to find creative ways to give them room to run and innovate.

There will be a bit of change coming to our organization, but the adjustments will be healthy for the company. [Emphasis added]

It now appears that the auction firm’s “bit of change,” healthy or not, will involve a staff shakeup.

Tad Smith, Sotheby's CEO, addressing the crowd before the first of the Taubman auctions Screenshot from webcast

Tad Smith, Sotheby’s CEO, addressing the crowd before the first of the Taubman auctions
Screenshot from “Masterworks” auction webcast

As described in the company’s 8-K report, filed Nov. 13 with the SEC, staff cutbacks will begin with voluntary buyouts, which may later be “supplement[ed] with involuntary separation programs” to achieve Sotheby’s unspecified “desired result.”

The 8-K goes on to say this:

Terminations under the voluntary separation incentive programs generally are expected to be completed in the first quarter of 2016. The severance costs under these programs are expected to be recognized in the fourth quarter of 2015 and cannot be reasonably estimated at this time.

In light of these developments, Smith’s praise for “my colleagues here at Sotheby’s,” at the beginning of last Monday’s conference call, now seems hollow. He must have known that he was about to drop the other shoe when he said this:

I want to take this opportunity thank all of my colleagues here at Sotheby’s for a job well done in executing these historic [Taubman Collection] sales flawlessly. Ours is the best team in the business and they are performing at a high level for our clients and our shareholders.

Not high enough, apparently.

Part of what’s driving the effort to cut costs is undoubtedly the desire of shareholders (including activist investor, now board member, Daniel Loeb) for robust profits. Sotheby’s adjusted net income (i.e., profit) declined 3% for the first nine months of 2015, as compared to the same period a year ago.

Sotheby’s would be in better financial shape if it weren’t for the enormous price paid for the Loeb intervention (detailed here) and the leadership transition—$10 million in severance costs (p. 9) and a more generous compensation package for Smith than for his predecessor.

As I’ve previously suggested, the so-so results of the Masterworks sale have cast significant doubt on whether the series of auctions from A. Alfred Taubman‘s collection, guaranteed by Sotheby’s for a whopping $515 million (without any third-party backing), can turn a profit. The Nov. 4 sale of the cream of Taubman’s 500-work trove brought a hammer total of $326.05 million ($377.03 million with buyer’s premium), considerably below Sotheby’s $374.8-million to $526.5-million presale estimate of hammer total.

This was the star lot:

Modigliani, "Paulette Jourdain," ca. 1919, sold for $42.8 million Photo by Lee Rosenbaum

Modigliani, “Paulette Jourdain,” ca. 1919, sold Nov. 4, $42.8 million
Photo by Lee Rosenbaum

The next day’s sale of lesser modern and contemporary works from the Taubman Collection fetched a total, including buyer’s premium, of $42.7 million. The buyer’s fee, from which Sotheby’s hopes to derive some profit, will go towards defraying the $515-million guarantee, if needed.

According to Sotheby’s 10-Q report filed on Nov. 9 with the SEC (p. 22), “The amount of the auction guarantee ascribed to [Taubman] property yet to be offered is approximately $54 million and covers property with a presale low estimate, excluding buyer’s premium, of approximately $48 million.” [Emphasis added]

Smith let slip near the end of last week’s conference call that “there’s a very interesting potential hedge partner that wants to wait and see how things go this week.” I’ve twice asked Sotheby’s (but as yet received no reply) about whether this “potential partner” has now decided to offer financial backing for guarantees, and if so, whether that would be applied to hedging Sotheby’s guarantee risks on the remaining Taubman offerings.

Taubman’s American art will be sold this Wednesday…

Martin Johnson Heade, "The Great Florida Sunset," 1887, est. $7-10m Photo by Lee Rosenbaum

Martin Johnson Heade, “The Great Florida Sunset,” 1887, est. $7-10m
Photo by Lee Rosenbaum

…and his old masters will be offered on Jan. 27:

Gainsborough, "The Blue Page," est. $3-4 million Photo by Lee Rosenbaum

Gainsborough, “The Blue Page,” est. $3-4 million
Photo by Lee Rosenbaum

Particularly galling to employees, if true, may be the background information tweeted on Friday by Kelly Crow, the Wall Street Journal‘s art-market reporter. I’ve sought, but have not yet received, confirmation from Sotheby’s that the first sentence is accurate:

Those who keep their jobs will be compensated according to new “performance metrics” that will “focus on group profitability and individual scorecards,” according to Smith’s remarks during the conference call. This sounds like the way things work in the financial industry, not the artworld.

Among the Sotheby’s staffers most likely to take advantage of the voluntary buyouts are those already on the cusp of retirement—experts with high knowledge and high salaries, due to their long years of service. Some may be under-performing, but others have a depth of art expertise and a breadth of artworld contacts that will be difficult to replace.

Whether such losses of talent will prove to be cost-effective in the long run is an open question.

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