Some compared it to Macy s buying Bergdorf Goodman.
Others in Manhattan residential real estate wondered why Sotheby s, the prestigious auctioneer, would sell the rights to its name to the highest bidder at any price.
But nearly all said that Cendant s agreement to buy Sotheby s U.S. real estate brokerage for $100 million was a good move for the expanding national conglomerate which owns Corcoran and the Sunshine Group and looks intent on gobbling up even more of Manhattan.
It was the highest price paid for a Manhattan residential firm, though a comparison of earlier deals must take into account that Sotheby s has 15 offices around the country, including Beverly Hills, Southampton and San Francisco.
The previous Manhattan record was Dottie Herman s purchase of Douglas Elliman for $71.8 million last year. Insignia bought the firm six years earlier for $71 million, and Barbara Corcoran sold her firm for around $70 million three years ago.
The deal adds a very high-end business to a national company with little experience running luxury brands. Under the $100 million agreement, Cendant will license the Sotheby s name for 50 years, with an additional 50-year option. The deal also includes Sotheby s 175-agency affiliate network.
Sotheby s has two offices and 115 agents in Manhattan.
“It s a wonderful name, and it s a good thing for Cendant to buy them,” said Hall Willkie, president of Brown Harris Stevens, who said he thought the $100 million price tag “seemed reasonable.”
“These things sell for three, five or seven times income, and here you are getting 15 offices, an affiliate network, and the name,” he said.
“I think it s a good deal and a good buy,” said Andrew Heiberger, CEO of Citi Habitats. “It s very clean, and more high-end than the Corcoran name.”
Growth seems to be the order of the day going forward, with Cendant planning to expand Sotheby s beyond its existing markets. Sotheby s has a stake in the expansion because it will receive royalties based on new franchises.
Bill Ruprecht, president and chief executive of Sotheby s, said the goal was to give the Sotheby s brand “dramatically more exposure among high net worth families throughout the United States.”
Richard A. Smith, chairman and CEO of Cendant s real estate division, said the company “looks forward to building and operating a franchise system” with Sotheby s.
But real estate executives say there is a risk of diluting the Sotheby s name through expansion. Others say that the Sotheby s real estate division could face a fallout among both brokers and consumers simply because it is no longer connected to the prestigious auction company, but instead belongs to the company that owns Avis Rent a Car and Days Inn.
“There is a pecking order in each firm s own mind in terms of prestige,” said Michele Kleier, president of Gumley Haft Kleier. “No broker wants to be bought out by a firm that they perceive has less prestige than their firm.”
Kleier said that was the case when Coldwell Banker Hunt Kennedy bought the 60-agent Charles H. Greenthal last year, and considerable staff turnover followed.
“There is no guarantee they will want to remain at the new Sotheby s,” she said. “It s a different culture they are going to have to deal with.” In terms of Cendant laying down $100 million for the company, Kleier said it would only be a good deal “if the brokers stay.”
The purchase could be problematic for home buyers and sellers as well, said Willkie.
“It changes Sotheby s position in the high-end business,” he said. “The seller of a $10 million apartment will know that Sotheby s is not that Sotheby s. Competitors will bring it up if the seller doesn t know. We could see a fallout at the high-end of the market.”
Willkie, who worked for Sotheby s years ago, said he was very surprised the auction business would agree to give up some control over its name.
“I never would have predicted that Sotheby s auction business would ever give up control of their name,” he said. “Your name is all you ve got.”
Beyond Sotheby s stated reason of why they sold the real estate division (they wanted to expand, and Cendant could help them with that), there has been some speculation about other reasons for the sale.
The sale might be a result of Sotheby s downscaling to offset losses following the United States Department of Justice investigation of price fixing involving Sotheby s and Christie s, in which both companies agreed to pay $268 million each to settle civil claims. In 2001, Sotheby s laid off about 8 percent of its staff and sold its Upper East Side headquarters in New York for $175 million.
Frederick Peters, president of Warburg Realty in Manhattan, said he doesn t think the sale had anything to do with the performance of the real estate division.
“It s a public company, and I ve looked at the numbers,” said Peters. “It has always looked like an extremely productive business.”
According to SEC filings from November, the real estate division brought in $27.6 million in revenues for the first nine months of 2003, down from $28.6 million the year before. The revenue for the auction business was around $174 million in the first nine months of 2003 (down $10 million from the first nine months of the year before), but that number would be proportionally much higher if it included the last three months of the year, because that is when Sotheby s does 35 to 40 percent of its auction business.
Peters said that it was likely the sale was “really more about what happened with the auction business. The lawsuit and settlement amounts were fairly substantial. This was an opportunity to raise a whole bunch of cash without affecting their core business.”
The deal, of course, is also the latest example of a national conglomerate coming in to buy a Manhattan firm. Smith of Cendant said his company plans to continue building its presence in New York.
Since its entry into the real estate business in 1995, Cendant has shown a voracious appetite for acquisitions, transforming itself into a real estate empire. The conglomerate, which is based in Manhattan, says it now has a hand in one out of every four residential real estate transactions across the nation.
NRT, a unit of Cendant, has acquired 50 firms per year over the past five years and now is more than twice the size of the next-largest residential brokerage, Minneapolis-based HomeServices of America. Cendant is also the world s largest real estate franchiser, owning the licenses of Century 21, Coldwell Banker, ERA Coldwell Banker Commercial, and Corcoran.
As far as HomeServices entry into Manhattan, president and CEO Ron Peltier told The Real Deal back in August that he expects his company to make acquisitions in New York sometime in the next two years.
Despite the increasing presence of conglomerates, Willkie thinks there will always be room for independents.
“I don t think all of the companies will sell,” he said. “And if someone came in and bought every independent – say, theoretically – brokers would spin-off and start their own companies again. Some brokers might find they can t service clients in an atmosphere like that.”
Independent, high-end Manhattan companies said they were happy about Sotheby s being bought, because it helped them to stand out more.
“Consolidation offers the few of us who now remain as smaller high-end boutique operations increasingly clear differentiation opportunities,” said Peters of Warburg.
“It helps us maintain a unique place in the market,” said Kleier, whose boutique firm has around 40 agents. “They can t possibly give the same service a smaller firm gives.”
Though if there is much more consolidation, Kleier joked, “I m going to be the third-biggest company in the city soon.”