ANALYSIS: Where Sotheby's Went Wrong -- Daniel Loeb Of Third Point Wants To Topple An Out-Of-Touch Imperial CEO

 @AlexCKaufman on October 02 2013 1:59 PM
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Sotheby's is struggling to compete with its rival, Christie's, and activist investor Daniel Loeb wants to depose the chairman and chief executive. REUTERS/Jacob Silberberg

Nine years ago, Sotheby’s (NYSE:BID) Chief Executive William F. Ruprecht, who had climbed to the venerable auction house’s top wrung in less than a decade, earned the title “Mr. Fixer.”

“I would think by today I have seen most any problem you can imagine,” the chairman and CEO said at the time.

But he hadn’t yet met Daniel Loeb, the billionaire head of activist hedge fund Third Point LLC.

In a letter addressed to Ruprecht, Loeb -- who deposed Yahoo Inc.’s (NASDAQ:YHOO) former CEO and tried recently to split up Sony Corporation (NYSE:SNE) – chided the Sotheby's CEO for a steep salary, superfluous perks and the auction house's anemic digital strategy as it struggles to compete against longtime rival Christie’s.

Now, Loeb wants Ruprecht to step down and divvy up his dual role at the company.

“We have heard many excuses – but no good reasons – why Sotheby’s competitive position is deteriorating, such as: ‘Christie's is buying market share and making uneconomic deals to make headlines,’ or ‘Christie’s  is private and doesn’t have to disclose its guarantees,’” Loeb wrote in the letter, a copy of which was obtained by International Business Times. “These pretexts are poor substitutes for the truth: Despite its advantages of historical superiority, a more prestigious brand, and a publicly traded currency with which it can attract, motivate and reward top talent, Sotheby’s has languished while Christie’s has thrived.”

Third Point declined to comment. Sotheby’s did not immediately respond to requests for comment.

Ruprecht’s 0.22 percent stake in the company pales before the 9.3 percent now owned by Loeb’s Third Point, the largest shareholder in Sotheby's. Yet, Loeb points out, Ruprecht's $6.3 million salary far surpasses those of chief executives at comparable firms.

“Your compensation award compares quite favorably to companies offered as peers in your own proxy statements: $3.9 million for the CEO of Nordstrom Inc. (NYSE:JWN) and $6.1 million for the CEO of Tiffany & Co. (NYSE:TIF),” Loeb wrote, “both companies more than three times the size of Sotheby’s – and yet Sotheby’s has clearly underperformed these ‘comparables.’”

Loeb billed Ruprecht’s lack of an Internet sales strategy as an embarrassment, cultivating a “demoralizing recognition among employees that Sotheby’s is not on the cutting edge.”

Sotheby's lack of a specific and compelling strategy has been on the investment community's radar for years. During a lengthy 2004 interview, Ruprecht turned a question on the interviewer.

“Tell me what we should be doing that we are not doing?” the Sotheby's chief asked the interviewer.

For Loeb, however, it's not just a question of what Ruprecht should be doing; it's also a question of what Ruprecht "shouldn't be doing."

In many observers' eyes Ruprecht has enjoyed the amenities of a corporate steward of a bygone era. The so-called “imperial CEO” who is also chairman has fallen out of fashion. Even media darling Jamie Dimon -- the CEO and chairman of JPMorgan Chase & Co. (NYSE:JPM), the world’s largest bank by assets – faced a fight to keep both titles during a shareholder vote in May.

And JPMorgan offers shareholders a dividend nearly four times that of Sotheby’s.

Despite all that, the auction house bankrolls Ruprecht’s car allowance, tax planning costs, and membership fees for elite country clubs, Loeb said.

“Sotheby’s is like an old master painting in desperate need of restoration,” Loeb wrote, adding that it’s time to broaden the firm’s scope in the global market. “Respectfully, we do not see evidence that you are the right person to repair the company and drive its growth in today’s global art market.”

Loeb said he already had two replacements in mind.

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