Sold to the Highest Bidder: Why Sotheby’s Is Going Private

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Wharton’s Jerry Wind, NYU’s Thomai Serdari and Kathryn Graddy from Brandeis discuss the sale of Sotheby’s and how going private will benefit the auction house.

Going once, going twice … sold for $3.7 billion dollars. As legendary auction house Sotheby’s prepares to go private, a slew of new opportunities beckon. They include the financial flexibility and the necessary confidentiality to go after bigger business deals; tapping into expanding global markets, and the use of advanced technology that could help Sotheby’s fetch the best prices by matching collections with art lovers’ preferences.

Sotheby’s last week announced that it has agreed to a purchase offer from French telecommunications billionaire and art collector Patrick Drahi for $3.7 billion, or $57 a share, which is a 61% premium on the last traded price. Drahi’s purchase vehicle is BidFair USA, and he is paying for it with $1.5 billion of his own funds and the remainder in loans, according to a Wall Street Journal report.

With Drahi in charge, Sotheby’s could pursue growth without the glare of public investors’ scrutiny and the pressure to deliver quarterly earnings over advancing longer-term goals. Going private also affords Sotheby’s the ability to offer guarantees to owners of art collections before those works of art are auctioned.

“Being a public company places significant constraints, especially in the market expectations for quarterly performance and the like,” said Jerry Wind, Wharton emeritus professor of marketing. Sotheby’s could use its new freedom well, given the competitive nature of the art market, he added.

Wind recalled that Sotheby’s last year lost to Christie’s the assignment to sell the Rockefeller collection, which eventually went for $832.6 million, the highest deal value for a single collection. That came a year after Christie’s beat it to acquire Leonardo Da Vinci’s Salvator Mundi painting, which was sold to a Saudi prince for $450 million, a record for the single highest price for a piece of art. “Both of them required guarantees, and a private company has a much easier time to provide the guarantees,” Wind said.

With Sotheby’s going private, the art auction business will be a level playing field, according to Kathryn Graddy, professor in economics and dean of the Brandeis International Business School. “It is very important that Christie’s and Sotheby’s remain competitive with each other because the industry is a duopoly,” she said. Christie’s and Sotheby’s together sell more than 80% of works priced over $1 million, according to an article in The Economist.

“There is nothing that will prevent some of the big technology firms like Alibaba or even Amazon from entering the art market.” –Jerry Wind

The company also saw going private as a way to shield Sotheby’s from the cyclical nature of art sales in which collectors tend to make big purchases when the economy is on the upswing and cut back during downturns, according to the Wall Street Journal report cited earlier. Last year, Sotheby’s sold $6.4 billion in art, up 16% from the prior year, compared with Christie’s $7 billion in sales, up 6% from 2017, the report added.

Art collections with “great value” have limited supply, said Thomai Serdari, adjunct professor of marketing at New York University’s Stern School of Business and business editor of Luxury: History, Culture, Consumption, an academic journal. “So, it makes perfect sense for Sotheby’s to go private and try to restructure its operations around producing better content that can lure in all these collectors who have amassed great art collections,” she added.

Wind, Graddy and Serdari explained how going private will give Sotheby’s a boost on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

Why Guarantees Matter

Guarantees help auction houses win deals because they promise a minimum payment to owners of art, irrespective of what the eventual sale price is. If the sale price is below the guarantee, the auction house takes on the loss; if it fetches more than the guaranteed amount, the owner and the auction house share the amount above the guarantee.

In fact, after losing the Rockefeller deal, Hugh Hildesley, Sotheby’s executive vice president, had admitted to Lee Rosenbaum for her blog in Artsjournal that his company could not provide guarantees as big as Christie’s could. “We’re a public company, and we can’t take the risk,” he told her.

As a private company, Sotheby’s could compete more effectively with Christie’s in pursuing those high-value assignments without compromising on its negotiation powers by publicly revealing the value of its guarantees. Guarantees are increasingly becoming a must for auction houses to attract top-grade art works. Alongside, a new breed of third-party guarantors has emerged, which helps auction houses distribute their risks and thereby take on more assignments.

The Talent Differentiator

According to Serdari, the crucial resource in an auction house is a “specialist,” whose job is to find art and assess it. “The specialist has to be extremely knowledgeable with a very large network of connections globally and be able to tap into these great collections but also have a team to do historical research, to look at historical auction prices to create estimates that are correct [and not] far off from the guarantees,” she explained. In her view, Sotheby’s was unable to focus adequately last year on those “operational resources” and summon the right talent.

Those specialists at auction houses also have to spot potential buyers years in advance, and invest in building relationships with them. “So you may have someone that you anticipate will have an estate in five years,” said Serdari. “You have to spend a lot of money on them for those five years, creating events, creating experiences and proving to them at regular intervals that you are worth your name, your brand’s name and the talent that you claim that you have in-house.”

Changing Owners

Wind said it would help Sotheby’s to be owned by Drahi, who is an art collector. Drahi is a “long-term investor with a long-term view,” Sotheby’s CEO Tad Smith told Cheddar, a video news startup. “That should behoove both clients and employees.”

Drahi is founder and chairman of the European telecommunications company Altice, which also has operations in the U.S. In recent years, his group has bought other media and telecom companies such as mobile phone services company SFR of France and Cablevision, according to a Business Insider profile.

Sotheby’s has danced between being publicly held and privately owned. It had gone public in the U.K. in 1977. In 1983, Michigan shopping-mall tycoon and art collector A. Alfred Taubman bought it and took it private, but the company went public again five years later. The 275-year-old company is the oldest listed company on the New York Stock Exchange. It has been publicly owned for the past 31 years.

Drahi’s purchase of Sotheby’s is expected to close in the fourth quarter of 2019 after securing shareholder approval. Wind noted that Sotheby’s shareholders “made a bundle” as the company’s share price soared from $35 to almost $59 after the announcement of the Drahi acquisition; earlier this month it had touched a low of $32.

“It is very important that Christie’s and Sotheby’s remain competitive with each other because the industry is a duopoly.” –Kathryn Graddy

New Markets, Brand Leverage, Tech Boosters

As a private company, Sotheby’s could invest unhindered in new markets, such as in building relationships with both younger art lovers and a growing number of high net-worth individuals outside of the U.S and Western Europe, such as in Latin America and China. It could also invest more freely in data analytics, artificial intelligence and other digital tools to gain insights into art market demand and to fine tune its offerings.

Further, it could grow its presence in online art auctions and private deals outside of auctions. The company could do more brand extensions to leverage its name and resources in other markets as well. Existing brand extensions include Sotheby’s Home, an online marketplace for interior design; Sotheby’s Wine; Sotheby’s Diamonds; and Sotheby’s Financial Services, which it claims is the world’s only full-service art financing company.

Global distribution networks of auction houses are also crucial to tap into a market that has expanded well beyond the traditional hunting grounds for art collectors in the U.S. and Europe. Wind noted that Sotheby’s will be able to capitalize on its long presence in Hong Kong, where it was the first big international auction house to open an office in 1973. “China is going to be the biggest art market in the world, if it’s not already getting there,” he said. A presence in that market will also help it bring on the right talent that could cultivate current and future art collectors, he noted.

The untapped potential for online art sales is “quite substantial,” said Serdari. She noted that in addition to Christie’s and Sotheby’s, other auction houses like Phillips and Heritage have also embraced internet sales. “A lot of the ultra-high net worth individuals are not necessarily in New York City. They may be in China, in South America or somewhere else in the world. The technology now is good enough to be able to sustain that sort of demand, and they have seen demand shifting to internet sales for sure.” Graddy added that Sotheby’s has been a leader in online art sales, and its status as a private company would help it “go full force.”

Sotheby’s CEO Smith told Cheddar.com that the company’s new corporate structure would allow Sotheby’s to continue to invest in modernizing the client experience for the digital age. He had noted that a “significant” portion of Sotheby’s client base is under the age of 40, and that the majority of art pieces fetch less than $10,000 in auctions.

According to Wind, Sotheby’s could also extend its “huge reach and continuous relationships at multiple touch points with its target customers” to become “a media empire.” He noted that it produces “fancy publications” and catalogs that could attract advertising revenues.

Serdari said the Sotheby’s retail store in New York sells “some rare Bordeaux wines that usually go on auction.” She added that “all luxury companies are today shifting more to [offering] a lifestyle experience,” and so many more such opportunities await Sotheby’s.

Both Christie’s and Sotheby’s have recently become more active than earlier in private sales, where they get potential buyers and sellers together outside of auctions, said Graddy. “There are synergies here between being an auction house and selling things privately.” Art galleries are worried over that growing trend of auction houses conducting private sales, she added.

“We should not forget that art is an emotional purchase.” –Thomai Serdari

AI, Big Data and Emotion

According to Wind, although both Christie’s and Sotheby’s have large amounts of data on art lovers and their persuasions, both are lagging in using artificial intelligence and cognitive computing. “Predictive AI is going to change the game to a large extent because it allows you to come up with a much more rigorous and accurate valuation of all the art pieces you are dealing with,” he said. It helps firms like Sotheby’s decide between offering select works of art through regular auctions or through private sales, he added. “In today’s environment, growth [for Sotheby’s] will mean to a large extent upgrading significantly their technology capabilities, especially in the AI area.”

Even as technology could help bring efficiencies to the art market, “we should not forget that art is an emotional purchase” that needs a human touch, said Serdari. “It has to be very personal and very real-life transactional, and that is the responsibility of the specialist.”

AI and the emotional aspect of art collecting could coexist, said Wind. “AI can add enormously in terms of understanding the motivation of the people involved, and customizing [offerings] to their specific needs,” he said. In fact, much work is underway in the field of artificial emotional intelligence or Emotion AI, he added. As it happens, Sotheby’s has in recent years expanded its digital initiatives and made major acquisitions like the scientific analysis firm Orion Analytical and an AI startup called Thread Genius, according to Artnet.com.

Longer-term Bets

The experts had different views on where Sotheby’s might want to grow the most in the future. Wind pointed out that works of art fall into two different market segments. One segment is the “really very high net-worth individuals,” who would continue to make their purchases the traditional way. If they are not present at auctions, they may place their bids by phone, he added. The second market is seeking lower-priced works of art, and that lends itself more to online sales, he explained. He expected the global market for lower-priced art to grow and become more and more competitive. “There is nothing that will prevent some of the big technology firms like Alibaba or even Amazon from entering the art market,” he said.

Graddy felt that in time, Sotheby’s might want to have “a greater portion of their sales to come from internet sales.” According to Wind, “the big opportunity” will be expanding globally, especially in China and other countries that are founts of emerging wealth.

Serdari thought both Sotheby’s and Christie’s might want to place their bets on younger consumers of art. “Both auction houses will have the responsibility of educating that younger public, and so the role of storytelling will be even more important in the next five years,” she said. “They will need to allocate more resources for their marketing departments to reveal the stories behind the items that they will be promoting, auctioning off or selling.”

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