Sotheby's Goes Private or Sotheby's Going Going Up

Sotheby’s, a publicly traded company for 30 years, has been purchased by Patrick Drahi for $3.7 billion including debt. In going private the firm joins the other major auction houses in the world, all of whom are private. While no reasons were given in Sotheby’s releases the company appears to have experienced a disconnect between how public companies are evaluated and auction houses function. Publicly traded companies must perform quarterly, report sales and earnings every 90 days and provide an essentially non-stop flow of positive releases to support their stock price. Privately held companies have no such public obligations and can focus on developing multi-year strategies, long the standard approach for the leading auction houses.

Said another way, when private auction houses weigh in with news it’s invariably to enhance their position with consignors and bidders. Sotheby’s by comparison also had to pay attention to how investors were responding. So Sotheby’s will not miss the public financial reporting and will again be able to develop their already significant strengths without having to keep an eye on the stock ticker whose demands frequently are at odds with auction house strategy and market cycles.

This is not to say that it was never logical for Sotheby’s to be public. I assume the reason the company went public was to achieve a higher public valuation as well as create a path to liquidity for the then principal owners. It is wonderful to build large companies but the exits are few and far between and going public, an option for only a few, can be exceptionally rewarding.

Most companies achieve success for their ownership by producing consistent and progressively higher earnings. In the auction field this is difficult for various reasons.

While a few auction houses control some of the material that comes into their rooms, most rely on consignments that are notoriously inconsistent. When markets are hot the consignments arrange themselves but when skepticism is out and about it’s easier to get an owner to shoot their dog than get them to consign. Actually a lot easier.

Owners of big things may want to sell but they are not willing to be humiliated by the public repudiation that is possible if their consignment is a little off, a little worn, or a little over estimated. In reality there’s a very small difference between a complete failure and an outstanding success. Sotheby’s has always had an exceptional touch but consignors do not always remember that.

As a public company, while they achieved liquidity for their owners, the price they have long paid is the loss of secrecy that every private auction house shrouds their plans and strategies in. As a public company, with the obligation to report earnings and prospects every quarter they are constantly forced to release information that potentially weakens their negotiation positions.

To counter this they moved ever higher in their pursuit of the most coveted collectibles. Today paintings occasionally bring $100 million but every house wants them and concessions to consignors are more the norm than the exception. In the rare book field not so much. In fact the next Gutenberg Bible, a symbol of humanism, enlightenment, and emerging literacy in spectacular condition, will probably open at half that amount.

As a private company Sotheby’s will have the flexibility the public company lacked and they will be, as they have long been, formidable.