Dan Loeb Buys SOTHEBYS

[indythinker85]

http://www.sec.gov/Archives/edgar/data/1040273/000119312513346480/0001193125-13-346480-index.htm

[tooskinneejs]

Loeb and Third Point increase their stake to 9% and write the following letter to Sotheby's asking for board seats and for the CEO to resign:

 

http://www.sec.gov/Archives/edgar/data/823094/000119312513388165/d605390dex993.htm

 

Here are a few excerpts:

 

"Your personal holding of 152,683 shares, representing a mere 0.22% interest, is particularly noteworthy because you have been an employee of the Company since 1980 and its CEO since 2000.  In sharp contrast to your limited stock holdings is a generous package of cash pay, perquisites, and other compensation. We see little evidence justifying your 2012 total compensation of $6,300,399 in both salary and PSU awards valued at over $4 million, seemingly based on a mysterious target not disclosed in any of the Company’s public filings. Your compensation award compares quite favorably to companies offered as peers in your own proxy statement: $3.9 million for the CEO of Nordstrom Inc. and $6.1 million for the CEO of Tiffany & Co. – both companies more than three times the size of Sotheby’s – and yet Sotheby’s has clearly underperformed these “comparables”."

 

"In the course of our investigation into the Company’s business practices, we came across numerous anecdotes of waste. Typical of the egregious examples was a story we heard of a recent offsite meeting consisting of an extravagant lunch and dinner at a famous “farm-to-table” New York area restaurant where Sotheby’s senior management feasted on organic delicacies and imbibed vintage wines at a cost to shareholders of multiple hundreds of thousands of dollars. We acknowledge that Sotheby’s is a luxury brand, but there appears to be some confusion – this does not entitle senior management to live a life of luxury at the expense of shareholders."

 

"once on the Board, it will be our top priority to commence a search for a new Chief Executive Officer from either within or outside the Company. Based on our due diligence and discussions with participants in the art market, there are at least two internal candidates for the CEO position who warrant serious consideration. We have already begun informal discussions with outside candidates and would welcome the opportunity to bring the internal candidates into a formal process."

[ItsAValueTrap]

I feel like some activist investors would make more money if they exercised more tact.  There's no need to be scathing when criticizing management.  By being openly hostile to the CEO, suddenly the CEO will focus on protecting his/her job and/or getting as much severance as possible.  He/she may rack up huge expenses on investor relations (and legal fees, etc. etc.) to fight any proxy battles.

[Williams406]

ItsAValueTrap,

 

I don't disagree with your point about how CEO's respond to activist criticism, but note that the intended audience for a letter extends beyond the parties to whom the letter is addressed. They can serve as a way to communicate with other shareholders as well. How would you handle communications differently if you were a large shareholder seeking a board seat and a CEO change? I ask honestly because I hope to be a large shareholder of almost any size company someday when I grow up and it may be necessary to oust the CEO. I've always just envisioned inviting the CEO to my office and saying calmly and evenly: "You're out, Tom." It might be tougher than that, though, if you need to garner support from other shareholders.

 

406

[siddharth18]

Feasted on organic delicacies and imbibed vintage wines at a cost to shareholders? HOW DARE THEY?!

 

 

On a more serious note, I always have fun reading Dan Loeb's letters. If nothing else, I can make some nifty additions to my growing arsenal of esoteric vocabulary.

[ItsAValueTrap]

Maybe I am a little biased because I dislike conflict in general.  Usually it's a lose-lose situation.

 

If you look at Buffett... he used to invest in cigar butts and then amass a sizable position in the company.  Then he would approach the board or CEO about making changes to the company.  At Berkshire Hathaway, he made a deal with the CEO to tender for shares for below intrinsic value.  That seemed like a win-win situation.  Buffett gets a high rate of return on his investment (he didn't get intrinsic value for his shares but who cares).  The CEO gets to keep his job.  There wasn't some ugly public battle where the activists pretty much push the CEO into acting like a complete douchebag (there are posts on my blog about Selwyn Resources).

 

Unfortunately, the CEO decided to try to screw Buffett by doing the tender offer at an eighth lower (or a sixteenth; can't remember).  So Buffett didn't tender and bought majority control of the company and then fired the CEO.  ;D  The rest is history.

 

He also realized that investing in cigar butts is not as good as finding the See's Candies, GEICOs, etc.

[siddharth18]

Maybe I am a little biased because I dislike conflict in general.  Usually it's a lose-lose situation.

 

If you look at Buffett... he used to invest in cigar butts and then amass a sizable position in the company.  Then he would approach the board or CEO about making changes to the company.  At Berkshire Hathaway, he made a deal with the CEO to tender for shares for below intrinsic value.  That seemed like a win-win situation.  Buffett gets a high rate of return on his investment (he didn't get intrinsic value for his shares but who cares).  The CEO gets to keep his job.  There wasn't some ugly public battle where the activists pretty much push the CEO into acting like a complete douchebag (there are posts on my blog about Selwyn Resources).

 

Unfortunately, the CEO decided to try to screw Buffett by doing the tender offer at an eighth lower (or a sixteenth; can't remember).  So Buffett didn't tender and bought majority control of the company and then fired the CEO.  ;D  The rest is history.

 

He also realized that investing in cigar butts is not as good as finding the See's Candies, GEICOs, etc.

 

I agree that fight is the worst way to resolve a conflict but at the end of the day, I suppose, all that matters is whether it works. And the participants usually drift towards a strategy that they feel is most effective and least expensive and has a high success rate. Looked at Loeb's track record, I'd say so.