When will Sotheby's start making money instead of spending money?

Sotheby's buys Art Agency Partners for $50 million in cash

Art Blog Story from United States. Published by Joseph K. Levene Fine Art, Ltd. on Saturday 23 January 2016.

Sotheby's purchases Art Agency Partners for $50 million cash  image CEO Sotheby's Tad Smith  image

Sotheby's agreed to purchase Art Agency Partners, a two year old boutique firm with 15 employees owned and founded by Amy Cappellazzo, former deputy chairman Christie’s; Allan Schwartzman, art adviser and Adam Chinn, formerly co-founder of Centerview Partners LLC and partner at the law firm of Wachtell, Lipton, Rosen & Katz.

These three principals signed a five year contract with Sotheby’s, although no mention was made of the additional employees, including Ed Tang, recently recruited Christie’s specialist and head of First Open.

How will Art Agency, Partners, founded just two years ago, improve Sotheby’s revenue

Tad Smith stated “It’s going to bring significant new profit and revenue streams to us, and it will deepen our bench considerably in terms of the high end of the fine-art market, private sales and overall deal making,” but provided no specificity regarding the actual revenue streams.

While Ms. Cappellazzo, Mr. Schwartzman and Mr. Chinn are clearly talented, what about the existing staff at Sotheby’s? Mr. Smith has intimated this acquisition will bolster private sales capability and new opportunities for growth in advisory services, isn’t Mr. Smith aware Sotheby’s has already had this capability for years. We question if Tad Smith ever talked to any of his employees; if he had, he might know that Sotheby’s already had the capable staff needed to improve private sales and revenue.

Tad Smith, President and CEO of Sotheby’s Tad Smith was hired as Sotheby’s CEO even though he lacked any experience in Fine Art
Sotheby’s CEO Tad Smith, who has never worked in the arts, nor even collects art, is credited as architect of the deal to purchase Art Agency Partners, which has immediately provided a windfall of $20 million each to Ms. Cappellazzo and Mr. Schwartzman and $10 million to Mr. Chinn.

What is the incremental revenue estimate from the Art Agency Partners Purchase?
According to Smith, Art Agency Partners is profitable, but Sotheby’s has not provided any specifics regarding the immediate estimate of incremental revenue generated by the $85 million acquisition. Commissions and fees were already being collected on both public and private sales at Sotheby’s, so how will this acquisition increase revenue?

How do Sotheby’s veteran employees perceive this acquisition?
In November 2015, Tad Smith announced Sotheby’s “is not as efficient a company as it could be” in a company wide memo, which led to forced buy-outs of 80 Sotheby’s employees at an estimated cost of $40 million plus. Sotheby’s planned to offer buyouts in August, but needed the manpower for the Taubman sale which is now recognized as one of the largest business failures in Sotheby’s history. Instead of guaranteeing $350 million, Tad Smith, a CEO without any art background, decided to guarantee $515 million to win the Taubman Estate, which has only generated about $430 million.

Tad Smith’s lack of Art World experience could spell disaster
It’s tricky running a company when the the CEO has no knowledge or appreciation of its core business; Tad Smith became CEO of Sotheby’s in March 2015 and acknowledged his lack of fine art expertise, but noted he was a quick study. He was able to get the board to overlook this handicap and receives an annual salary of $7.2 million with a $3.1 million signing bonus. Mr. Smith will be paid more than William Ruprecht, former CEO of Sotheby’s, who earned $6.7 million in 2014.

We questioned Sotheby’s choice of Smith in a post here; and the financial markets concur as Sotheby’s stock has been in steep decline since his hire.

In the New York Times, Ms. Cappellazzo said she believed that “Sotheby’s is on the upswing” and that “their lowest low is behind them.” Perhaps Ms. Cappellazzo needs to get a new crystal ball as the stock has continued its decline since the acquisition.