To win busi­ness, Christie’s and Sotheby’s are sweet­en­ing the pot for cer­tain sell­ers

“En­hanced” sales mean hand­ing back com­mis­sions to col­lec­tors “They’d do any­thing to get the deal away from the com­pe­ti­tion”

Bloomberg Businessweek (Asia) - - CONTENTS - Katya Kaza­k­ina The bot­tom line The art mar­ket has been hot in re­cent years, but a price war has led auc­tion houses to give up some of their profit mar­gin.

The bids spi­raled higher and higher un­til—bang!—the ham­mer fell: Sold, for $62.75 mil­lion.

A sense of re­lief rip­pled through the el­e­gant Man­hat­tan head­quar­ters of Sotheby’s in Novem­ber when a cel­e­brated paint­ing by Cy Twombly, Un­ti­tled (New York City), set an auc­tion record for the artist. For be­hind the heady price was a hard busi­ness re­al­ity: Even as the crowd was sip­ping Cham­pagne ear­lier that evening, Sotheby’s was still fran­ti­cally woo­ing the buyer, putting to­gether a com­plex deal to se­cure his bid. Hav­ing also made con­ces­sions to the Twombly’s seller, the auc­tion house ended up giv­ing up much of its own cut for sell­ing the mas­ter­piece, ac­cord­ing to peo­ple fa­mil­iar with the sale.

Like many works of art th­ese days, the 1968 Un­ti­tled was sold un­der what’s po­litely known as the en­hanced ham­mer, which means the seller got more than the price an­nounced when the ham­mer fell. In essence, much of the com­mis­sion paid by the buyer to the auc­tion house ends up go­ing to the seller. In the Moët-and­bel­uga auc­tion trade, th­ese sweet deals are tele­graphed in code. A 105, for in­stance, means the seller gets an extra 5 per­cent on top of the ham­mer price.

Since 2009, art prices have soared and sales have more than dou­bled. But a war for mar­ket share has bro­ken out be­tween the two big auc­tion houses, Sotheby’s and Christie’s. “They’ve been mak­ing ab­so­lutely ab­surd deals just to be seen sell­ing this Koons or that Rothko,” says David Nash, co-owner of the Mitchell-Innes & Nash gallery and a for­mer Sotheby’s ex­ec­u­tive. “They’d do any­thing to get the deal away from the com­pe­ti­tion.”

The Sotheby’s com­mis­sion mar­gin— rev­enue from com­mis­sions as a per­cent­age of auc­tion sales—has dwin­dled to about 14 per­cent from 21 per­cent in 2009, though the fees were still worth more over­all, ac­cord­ing to com­pany fil­ings. Christie’s, a closely held com­pany, isn’t re­quired to re­port fi­nan­cial re­sults, but it’s been known to of­fer an en­hanced ham­mer as well. Last May, when the house auc­tioned off a piece owned by Shel­don Solow—a sculp­ture by Al­berto Gi­a­cometti that went for a $126 mil­lion ham­mer price—it handed much of its $15.3 mil­lion in fees back to the real es­tate de­vel­oper, ac­cord­ing to a per­son fa­mil­iar with the mat­ter. Rep­re­sen­ta­tives for Christie’s de­clined to com­ment on the deal, and Solow didn’t re­turn phone calls.

Auc­tion ex­ec­u­tives have been will­ing to cut deals on cer­tain higher-pro­file sales in hopes of gen­er­at­ing buzz and bet­ter prices for other works. Even if the house fares poorly on one lot in a given auc­tion, it might still profit on “the eco­nom­ics of the en­tire

sale,” says Evan Beard, na­tional art ex­ec­u­tive at U.S. Trust.

The en­hanced ham­mer is only one tool the houses are us­ing. When Sotheby’s auc­tioned off the Twombly, it gave the seller, Los An­ge­les art pa­tron Au­drey Ir­mas, most of its $7.8 mil­lion buyer fee, say the peo­ple fa­mil­iar with the mat­ter, on top of the ham­mer price. It also made a risky agree­ment with the buyer, hedge fund man­ager Daniel Sund­heim: Ac­cord­ing to a fi­nan­cial fil­ing by Sotheby’s with New York state and peo­ple fa­mil­iar with the deal, the house let the col­lec­tor pay for the Twombly largely with an art swap. Sund­heim pledged to con­sign seven other works, in­clud­ing a Warhol and a Basquiat, with a com­bined es­ti­mated value of $50 mil­lion to $75 mil­lion. Sotheby’s guar­an­teed him min­i­mum prices for the pieces— a move that would leave the house on the hook if prices fall short. Sotheby’s, Sund­heim, and Ir­mas all de­clined to com­ment.

A new man­age­ment team at Sotheby’s, led by Chief Ex­ec­u­tive Of­fi­cer Tad Smith, seems less will­ing to trade prof­its for mar­ket share. In Fe­bru­ary he told an­a­lysts that the deal­mak­ing re­mains “fairly sig­nif­i­cant” for highly com­pet­i­tive col­lec­tions, but also that he’s see­ing signs of fewer give­backs on sin­gle con­sign­ments. The same goes for Christie’s. “We’re try­ing to re­cal­i­brate the mar­ket and per­suade the sell­ers to come to a more re­al­is­tic point of view,” says Brett Gorvy, global head of post­war and con­tem­po­rary art at the Lon­don-based house. “We be­lieve that if we work very hard and cre­ate value for the con­signor, we should be paid for it.”

Will col­lec­tors be will­ing to forgo deals that have been so lu­cra­tive? Thomas Danziger, a New York lawyer who ne­go­ti­ates auc­tion sales for ma­jor deal­ers, ad­vis­ers, and col­lec­tors, agrees the auc­tion houses want their old com­mis­sions back. But he says that may not be so easy, es­pe­cially when the art mar­ket is show­ing signs of cool­ing: “We’d ask for en­hanced ham­mer for any­thing.”

Twombly’s Un­ti­tled (New York City)

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