PRESS  RELEASE                         FOR  IMMEDIATE  RELEASE        

IN  RESPONSE  TO  NUMEROUS  INQUIRIES    FROM  MEMBERS  OF  THE  PRESS  AND  THE  INVESTOR  COMMUNITY    

FOLLOWING  MR.  DANIEL  LOEB’S  LETTER  TO  MR.  WILLIAM  RUPRECHT,    ARTVEST  OFFERS  THE  FOLLOWING  STATEMENT  

 NEW  YORK,  October  7,  2013.  We  believe  that  the  in-­‐depth  analysis  of  Sotheby’s  that  Artvest  presented  to  Citibank’s  clients  in  April  2013  detailing  limitations  on  Sotheby’s  growth  has  precipitated  investor  activism  in  that  company.  We  feel  it  is  now  important  for  us  to  clarify  a  discussion  that  is  playing  out  in  the  press  with  varying  degrees  of  accuracy.  There  are  a  number  of  points  that  were  raised  in  Mr.  Loeb’s  letter,  and  in  the  subsequent  direct  and  indirect  rebuttals  by  Sotheby’s,  that  we  would  like  to  address:    

1. Mr.  Ruprecht  and  his  supporters  have  been  referring  to  the  increase  in  Sotheby’s  stock  price  as  a  reflection  of  his  success  in  managing  the  firm.  This  is  specious.  If  one  examines  the  performance  of  Sotheby’s  stock  over  time,  fluctuations  in  its  price  are  more  closely  related  to  the  performance  of  the  equities  markets  overall,  and  quite  independent  of  Sotheby’s  performance.  Indeed,  after  Sotheby’s  missed  earnings  targets  in  the  first  and  second  quarters  of  this  year  due  to  its  deteriorating  commission  margins,  Sotheby’s  stock  price  quite  illogically  continued  to  increase.  As  longtime  observers  of  the  stock,  we  are  of  the  opinion  that  this  is  because  most  of  the  investment  community  does  not  understand  the  art  auction  business  and  in  particular  the  nature  of  Sotheby’s  competition  with  Christie’s  since  that  company  is  privately  held  and  does  not  disclose  its  financials.  In  addition,  many  analysts  often  compare  Sotheby’s  to  luxury  retail  that  is  not  at  all  comparable  to  the  art  auction  business.  

 We  maintain  that  the  recent  run-­‐up  in  Sotheby’s  stock  price  is  related  more  to  speculation  over  the  future  of  Sotheby’s  ownership  and/or  management  brought  to  light  by  our  analysis  and  advanced  by  the  activity  of  Marcato  Capital  and  Third  Point.  The  fundamentals  of  Sotheby’s  and  future  trends  in  the  industry  (which  we  explain  below)  do  not  support  the  current  stock  price  unless  significant  changes  in  the  company’s  operating  strategy  are  undertaken  soon.  It  is  profoundly  ironic  now  for  Mr.  Ruprecht’s  supporters  to  use  this  price  rise  as  the  ultimate  signifier  of  the  success  of  his  stewardship.  

   

 

 

October  7,  2013  /  Page  2      

2. We  acknowledge  that  Mr.  Loeb’s  letter  was,  in  style,  personal  and  provocative,  but  in  substance  it  was  correct.  Sotheby’s  executive  management  team  has  been  materially  unchanged  since  before  the  price-­‐fixing  scandal  (except  for  the  departure  of  the  then  Chairman  and  CEO).  With  a  management  culture  that  was  forged  in  the  mid-­‐90s,  long  before  the  rise  of  the  Internet  and  the  ascendancy  of  Asia  and  the  Middle  East,  the  team  is  resistant  to  real  change,  and  US-­‐centric  in  a  way  that  is  deeply  out  of  step  with  the  multicultural  mind-­‐set  of  the  wealth  dominating  the  art  market  today.  (During  this  same  period  Christie’s  has  had  two  sweeping  changes  in  its  executive  team.)    This  is  the  root  cause  why  Sotheby’s  has  followed  rather  than  led  Christie’s  in  growing  Asian  and  Middle-­‐Eastern  markets,  as  well  as  squandered  its  one-­‐time  dominance  in  Asia  that  it  is  currently  celebrating  with  its  40th  anniversary  as  the  pioneering  auction  house  in  Hong  Kong.  Sotheby’s  own  Asian  experts,  both  current  and  former,  are  the  most  vocal  about  this  cultural  myopia.  If  it  is  not  addressed,  over  the  long  term  Sotheby’s  will  continue  to  decline  in  market  share  due  to  the  increasing  prowess  of  auction  houses  in  mainland  China  as  well  as  from  gains  by  Christie’s  which  has  consistently  treated  Asia  as  one  of  its  highest  priorities  for  the  past  twenty  years.  

 3. As  we  reported  in  our  April  analysis,  the  significant  growth  in  Sotheby’s  

business  from  2003  to  2012  was  entirely  attributable  to  a  once-­‐in-­‐a-­‐lifetime,  exponential  growth  in  the  global  art  market  of  151%;  a  follow-­‐on  effect  of  Asia,  Russia  and  Eastern  Europe  joining  the  global  economy  in  the  1990s  simultaneously.  In  fact,  because  Sotheby’s  had  abandoned  the  low-­‐end  of  the  market  during  this  period,  its  sales  did  not  even  keep  pace  with  the  expansion  of  the  art  market,  growing  at  127%,  versus  Christie’s  sales  growth  that  matched  151%  exactly.      This  is  no  small  matter,  as  Artvest  now  expects  the  Art  Market  to  remain  in  a  mode  of  slow  growth  for  the  next  five  to  ten  years.  Thus  raising  the  question,  how  and  where  will  Mr.  Ruprecht  find  ways  to  grow  Sotheby’s  business  especially  in  the  context  of  such  serious  commission  erosion?  We  have  yet  to  hear  a  clear  vision  for  dealing  with  this  problem,  or  even  an  acknowledgement  that  Sotheby’s  is  facing  a  more  stagnant  marketplace,  other  than  their  oft-­‐repeated  disclosure  that  competition  for  key  consignments  remains  fierce.  Counter-­‐intuitively,  in  a  riskier,  low-­‐growth  environment,  Sotheby’s  intends  to  increase  its  exposure  on  auction  room  guarantees,  reverting  to  a  practice  that  got  it  into  very  deep  trouble  in  2008.  

     

 

 

October  7,  2013  /  Page  3      

4. Sotheby’s  has  defended  its  current  strategy  of  focusing  on  the  high-­‐end  as  an  effort  to  position  itself  like  a  private  bank.  The  flaw  with  this  thinking  is  that  most  of  the  leading  publicly  traded  banks  such  as  JP  Morgan,  have  both  private  and  retail  banking  divisions,  as  the  two  have  different  business  cycles,  risks  and  fees,  often  supporting  and  complementing  one  another  in  a  dynamic  marketplace.  If  JP  Morgan  were  to  focus  on  its  private  bank  at  the  expense  of  its  Chase  retail  unit,  Wall  Street  would  consider  it  a  much  lesser  company  indeed.      This  is  in  fact  what  has  happened  to  Sotheby’s  in  the  thirteen  years  that  Mr.  Ruprecht  has  pursued  his  flawed  private  banking  concept,  and  the  chickens  are  just  now  coming  home  to  roost.    By  focusing  exclusively  on  the  high-­‐end  where  the  competition  with  Christie’s  is  most  extreme,  Sotheby’s  has  made  itself  uniquely  vulnerable  to  the  erosion  of  its  Auction  Commission  Margin,  the  main  revenue  stream  that  accounts  for  approximately  80%  of  the  firm’s  Total  Revenue.      Moreover,  by  leaving  the  low-­‐end  uncontested  for  Christie’s,  that  company  can  charge  higher,  non-­‐competitive  rates  in  segments  where  Sotheby’s  is  no  longer  active,  and  offset  those  gains  against  other  losses  in  commission  give-­‐  backs  at  the  high-­‐end.  (In  this  regard,  we  have  a  material  disagreement  with  Mr.  Loeb:  Christie’s  is,  as  Artvest  can  attest,  verifiably  buying  market  share  at  the  high-­‐end.  Yet  the  larger  point  is  true,  that  Mr.  Ruprecht’s  management  practices  have  exacerbated  the  problem.)  

 5. Importantly,  Sotheby’s  exclusive  focus  on  the  high-­‐end  has  left  the  company  

more  vulnerable  to  market  downturns.  Make  no  mistake,  the  art  market  is  cyclical;  periodic  influxes  of  large  numbers  of  new  collectors  has  never  changed  that,  and  never  will.  When  a  downturn  hits,  wealthy  collectors  stop  selling  as  they  have  the  liquidity  to  hold  on  to  their  art  until  prices  return  to  former  levels.      It  is  the  low-­‐  to  middle-­‐end  of  the  market,  i.e.  dealers,  estates  and  less  wealthy  collectors,  who  keep  the  market  alive  and  liquid  during  a  contraction  and  provide  revenue  streams  across  diverse  collecting  fields  to  pay  for  the  high  fixed  costs  of  an  art  auction  house.  This  was  the  case  for  Sotheby’s  in  the  busts  of  1980  and  1990.  Yet  in  the  crash  of  2008,  Sotheby’s  no  longer  had  this  buffer  to  cushion  its  fall.  Christie’s,  on  the  other  hand,  was  able  to  glide  to  a  softer  landing  during  this  most  recent  bust.    

   

 

 

October  7,  2013,  Page  4      

6. Mr.  Ruprecht  has  transformed  Sotheby’s  into  a  much  smaller  business  versus  the  competition,  a  fact  that  has  been  disguised  by  the  swift  and  ongoing  inflation  of  art  prices.  In  2012,  Sotheby’s  sold  14,100  lots  to  Christie’s  27,500.  And  as  Mr.  Loeb  pointed  out,  Christie’s  sold  more  lots  over  $1  million,  the  segment  of  the  market  that  Sotheby’s  has  targeted  as  its  main  focus.  One  could  argue,  at  least  by  this  measure,  that  Sotheby’s  has  become  half  the  company  that  Christie’s  is  today.  

 7. Without  a  stake  in  the  low-­‐end,  Sotheby’s  has  no  entry  point  for  developing  a  

coherent  Internet  strategy.  Christie’s  success  with  its  Internet-­‐only  Warhol  and  Liz  Taylor  auctions,  as  well  as  the  market  penetration  of  smaller  auction  houses  and  new  online  bidding  platforms,  have  resoundingly  established  this  fact.  

 8. Although  repeatedly  approved  by  the  Board,  Mr.  Ruprecht’s  compensation  

has  been  a  corrosive  issue  within  the  ranks  of  Sotheby’s  for  some  time.  For  this  and  other  reasons,  including  Mr.  Ruprecht’s  limited  role  in  consignment  getting,  when  Mr.  Loeb  says,  “Sotheby’s  crisis  of  leadership  has  created  dysfunctional  divisions  and  a  fractured  culture,“  he  is  illuminating  a  concern  that  none  have  been  courageous  enough  to  voice  so  publicly.      

9. In  order  for  Sotheby’s  to  catch  up  to  Christie’s  in  the  growth  areas  of  the  art  industry  –  in  Asia,  Contemporary  Art,  the  Internet  and  the  low-­‐end  segment  –  Sotheby’s  will  need  to  attract  an  influx  of  innovative  executives  and  deepen  its  bench.  Unfortunately,  the  same  “fractured  culture”  described  by  Mr.  Loeb  has  become  a  meaningful  deterrent  for  some  of  the  best  and  the  brightest  talent  to  join  the  firm  and  Sotheby’s  human  resource  policies  urgently  need  to  be  reviewed  at  the  highest  level.  

 10. Sotheby’s  has  one  of  the  most  valued  and  respected  –  yet,  with  its  paucity  of  

executive  vision,  under-­‐leveraged  –  luxury  brands  in  the  world.  It  has  many  of  the  most  highly  regarded  art  specialists  in  the  industry,  and  has  some  strong  talent  within  the  current  management  team.  Before  Sotheby’s  Board  girds  itself  for  a  protracted  battle  with  Mr.  Loeb  on  issues  he  has  raised  which  are  legitimate,  we  would  hope  that  they  will  consider  the  toll  that  such  a  public  dispute  is  going  to  take  on  the  brand,  on  the  morale  of  a  dedicated  and  hard-­‐working  staff,  and  most  importantly  in  the  near  term,  on  Sotheby’s  ability  to  compete  for  key  consignments  during  a  period  of  management  uncertainty.    

     

 

 

October  7,  2013  /  Page  5    

 Notwithstanding  their  justifications,  the  actions  taken  by  Mr.  Ruprecht  and  the  Board  this  past  Friday  may  not  in  fact  serve  the  broader  interests  of  the  majority  of  Sotheby’s  stakeholders.  To  engage  with  Mr.  Loeb  in  a  contentious  struggle  to  save  Mr.  Ruprecht’s  job  as  CEO  is  likely  to  further  relegate  Sotheby’s  to  secondary  status  for  several  more  years  to  come.  One  only  need  recall  Sotheby’s  troubled  year  immediately  after  the  company’s  anti-­‐trust  guilty  plea,  to  be  reminded  what  the  stakes  are  when  clients  lose  confidence  in  an  auction  house.      As  Sotheby’s  Board  faces  this  very  real  prospect  of  handing  its  competitor  an  even  greater  edge  in  consignment-­‐getting,  one  has  to  ask,  are  they  upholding  their  fiduciary  responsibility  to  shareholders,  or  are  they  merely  protecting  a  reassuring  status  quo?  If  the  Board  of  Sotheby’s  were  only  to  speak  candidly  with  their  own  specialist  base  and  neutral  parties  in  the  industry,  they  will  find  their  answer.    

In  short,  we  agree  Mr.  Loeb’s  letter  was,  as  Sotheby’s  has  responded,  “incendiary.”  What  it  was  not,  was  “baseless.”  For  those  investors  who  continue  to  doubt  the  validity  of  the  concerns  raised  by  Mr.  Loeb  as  well  as  those  raised  initially  and  early  on  by  Artvest,  we  would  advise  them  to  closely  watch  Sotheby’s  financial  results  going  forward.  Record-­‐setting  auction  prices  are  good  for  garnering  press,  but  they  have  little  to  do  with  the  problem  of  the  blinkered  strategies  for  growth  in  place  at  Sotheby’s  presently.      If  the  Sotheby’s  Board  chooses  to  disregard  these  concerns,  the  real  beneficiaries  of  their  intransigence  will  not  be  the  shareholders  of  Sotheby’s  but  Mr.  Francois  Pinault.      Michael  Plummer           Jeff  Rabin  Principal             Principal