The fight for control of the online company Artnet is turning ugly. The firm, best known for its searchable auction-price database, rebuffed an attempted hostile takeover bid in August but now faces a lawsuit from two minority shareholders. Meanwhile, the company hoping to wrest control of Artnet is set to declare new details of its takeover offer.
Artnet seemingly stymied the takeover by introducing a new voting mechanism to limit shareholders’ rights with a so-called “poison pill” that was approved by the majority of shareholders during an acrimonious 13-hour annual general meeting on 8 August. Previously, 50% approval was needed for any major changes to the company. Now, 75% is required. This effectively grants a 1% veto to Hans Neuendorf, Artnet’s founder, who owns 26% of the shares. Though this makes it easier for the current management to maintain its agenda, it reduces the company’s flexibility overall. Artnet’s chief executive officer, Jacob Pabst, denies that this is not in the interests of the company and says that around half of all German corporations have a similar 75% threshold. However, “Neuendorf is the only party that will profit from the poison pill. This is not in the interests of the company,” says the Düsseldorf-based lawyer Peter Dreier.
Dreier represents two shareholders who together own 70,000 shares, and who intend to file an “act of avoidance” to prevent the measure taking effect. “The management board and the supervisory board have to take a neutral position in a takeover situation, which in reality they have not done,” he says.
He also claims that Neuendorf acted in concert with some of the other shareholders (which is only legal if officially disclosed). A further point of dispute is the length of the annual meeting: under German law, these meetings must begin and end on the same day. Dreier says that the meeting ended two minutes after midnight, so the meeting resolutions are void. Pabst denies that anyone acted in concert with anyone else, or that the meeting overran.
The key players
Artnet was founded in Germany in 1989. Hans Neuendorf joined that year and became chief executive in 1995. His son, Jacob Pabst, took over the reins in June this year. There were four main strands of the business until this summer: an auction platform, the price database, the “Artnet Galleries” tool and an online magazine (which closed in June). So far this year, Neuendorf has spent €179,600 buying more than 43,000 additional shares in Artnet.
The takeover attempt is being made by Redline Capital Management, chaired by the billionaire businessman Vladimir Evtushenkov, the owner of the Moscow-based investment company Sistema.
Redline filed a mandatory disclosure to German authorities on 29 May, announcing its purchase of a more than 5% ownership interest in Artnet. By law, the firm must make public the terms of its takeover bid and was expected to do so as we went to press.
The art dealership Weng Fine Art became the first publicly listed art-trading company in Germany when it floated on the German stock exchange in January. It was acting with Redline to acquire Artnet until 9 August—together their shares totalled around 10%. But the day after the company’s annual meeting on 8 August, Weng dissolved the agreement and “significantly reduced its investment in Artnet”, according to a statement on the company’s website. It is not clear who bought the shares.
The identity of the two private shareholders bringing the lawsuit is unknown. Their lawyer, Peter Dreier, says they are not connected to Redline or to Weng.
The figures
Artnet has been haemorrhaging capital. According to its last six-monthly report, filed on 30 June, its cash balance decreased from €2.1m in December 2011 to €1.3m in June. The group’s operating cash flow fell from €336,000 in June 2011 to €218,000 this year. Total liabilities increased by €898,000 from €2,634,000 in December to €3,532,000 in June. There were hefty expenditures, including €572,000 spent on relocating its New York office to the historic Woolworth building and the €1.4m cost of closing its Paris office and the magazine.
The firm is committed to its auction business, which grew by 27%—an increase from €1.1m to €1.4m—in the six months from January to June this year compared with the same period in 2011. Revenues from the price database grew by 5%. Nonetheless, membership of Artnet Galleries is at an all-time low of 2,000 and advertising revenue fell by 26%.
Future direction
Skate’s Art Market Research’s most recent filing on 30 July urged shareholders to overthrow the current management and proposed a two-pronged vision for a new Artnet. Although Skate’s previously called for Artnet’s magazine to be shut down, it now says the closure was a “mistake” and that the company should rebuild its media arm as a mixed data/editorial model in the vein of Bloomberg or Reuters. It also suggests that the company should embark on an aggressive acquisitions spree, buying up the best of its e-commerce competitors. This would require a serious cash injection from new investors. “They have to do something or they will go out of business,” says Skate’s founder, Sergey Skaterchikov. “Artnet’s only hope is the online trading of art and it’s not good or quick enough right now.”
Hans Obermeier, a spokesman for Redline, says that Artnet’s “situation is not very comfortable. The problem is that they cannot generate external funding and cash at this point. It is a great brand with a potentially strong market position, but it needs investment that the company obviously has not been able to generate. Redline is in a position to provide funding.”
“We welcome new investors but we don’t need cash,” says Jacob Pabst, who refutes the allegation that the business is threatened. He says that the main reason for the decline in stock price and profits is the huge investments the company has made in restructuring and cost-cutting exercises, as well as major investment in product development (it spent $6.2m over four years, according to its 2011 financial reports). “The initial costs of implementing the new organisation will be behind us after the third quarter of 2012 with savings of €600,000 this year and more than €2m next year. Profitability is around the corner,” he says.
With the threat of legal action looming and details of the takeover bid about to be announced, the battle for control of Artnet is not yet over.
The role of Skate’s Art Market Research
Skate’s Art Market Research was founded by Sergey Skaterchikov (below) in 2004. He had previously approached Artnet about a possible partnership. “For a time, I was openly saying that if there was a way for Skate's and Artnet to work together, I would have been delighted—I was definitely making advances,” Skaterchikov says.
”Sergey approached us a couple of times and was interested in partnering with us or purchasing a part of the company,” says Jacob Pabst, Artnet’s chief executive. “He wanted to buy out Hans and some of the older investors. Hans rejected the offer because the stock price was way too low for where we see it going.”
Skaterchikov denies that he wanted to buy the company. “I didn’t have the means to buy Artnet. I didn't even try.” Nonetheless, he adds: “I didn’t want to be a passive shareholder with Neuendorf; I wanted some leverage, so I spoke to capital providers. I basically convinced Redline to become shareholders.” This coincided with his appointment to Redline’s board, he says.
In December 2010, Skate’s predicted that Artnet would be a “top-performing stock in 2011”. Since then, as Artnet continued to run at a loss, Skate’s coverage has intensified and become more negative. Pabst sees signs of “market manipulation. It’s a strange coincidence that every other newsletter Skate’s published [after the rejection] was about Artnet. It’s clearly damaging.”
Skaterchikov denies this. “I’ve been writing critical reports about Artnet for years. I know the argument is that we were trying to drive the price down, but not at all. I always wanted to be friendly.”
Skate’s temporarily suspended its analysis in May when Skaterchikov was appointed to Redline’s board. It has since resumed its coverage. “Any conflict of interest was mitigated by the fact that Skate’s was not influencing public opinion at the most sensitive time,” Skaterchikov says.