From: thf2@ellis.uchicago.edu (Ted Frank)
Subject: Why Owners Buy Teams
Keywords: Independent auditors, fraud, finances
Reply-To: thf2@midway.uchicago.edu
Organization: University of Chicago Computing Organizations
Date: Sat, 19 Dec 1992 20:42:40 GMT

In article <kbanaian.120.0@bernard.pitzer.claremont.edu> kbanaian@bernard.pitzer.claremont.edu (King Banaian) writes:
>In article <1992Dec18.230822.13918@midway.uchicago.edu> thf2@ellis.uchicago.edu (Ted Frank) writes:
>>>The purpose of their study was to estimate franchise values (BTW, Ted, the 
>>>lowest was $75m, for Montreal), not to accurately demonstrate the profits of 
>>>each team.
>>
>>Computing franchise values from revenue streams is like trying to calculate
>>what 19th-century impressionists will go for on the open market based on
>>bond price fluctuations.  It's purely a function of how many rich men want 
>>to buy sports teams and how many sports teams there are out there to buy.  
>>The days of the Bill Veeck/Calvin Griffith type owner who had 100% of his 
>>net worth locked up in his team are over, for better or worse (or both).
>>
>Aw, Ted, this is a very disappointing statement.  You mean to tell me that 
>franchsie prices are capriciously chosen by two men (and Large Marge) out of 
>thin air over cigars and cognac?  

Where do I say this?

>Nonsense -- the price of the team is 
>computed in FW, reasonably, by a multiple of sales.  This is the way mergers 
>and acquisitions are done in all industries.  (The multiplier for baseball 
>is computed at a base of 2x revenues, with higher multipliers for teams with 
>favorable stadium leases or local media contracts;  the Dodgers rank the 
>highest with a 2.5 multiplier.)  

Pshaw.  Poppycock.

It doesn't do many any good to have $50 million in sales if there's $60
million in expenses.  Such a commodity is worthless, not worth $100 million
(unless I could anticipate that I could either reduce costs or increase sales
to become profitable.)  If teams were *financial* commodities, rather than
expensive toys, there would be no way on earth the Milwaukee franchise
would be worth $75 million.  For the same $75 million, I could invest in
T-bills and make much more money at much lower risk (assuming the FW figures
were correct).  Nobody buys teams any more to make money.  If a team does
make money, it's lagniappe (added to the subjective value of the franchise)
-- the franchise could still be sold and the money invested in a different 
industry for more money at less risk.

>You might wish to explain the Veeck/
>Griffith comment, for I fail to see its relevance.

If a baseball team is my only source of income, I wouldn't own a baseball
team (and neither would Veeck or Griffith).  The average baseball team,
allegedly, according to FW and others, makes $4 million a year.  But, if
I'm interested in making money, rather than the joy of owning a baseball
team, I wouldn't have $100 million tied up in a franchise that's bringing
me a 2.7% after tax return.  The money-making value of an average baseball 
franchise isn't more than $30-$50 million -- less, when you consider that
baseball's a fairly risky industry, with uncertain possibilities of being
regulated, an unsure source of television revenues, and a strong likelihood
of labor-management troubles.  The vast majority of the value of a baseball
franchise lies in the subjective pleasure of owning the team (and the feeling
that someone else would be willing to pay $100 million for it.)  It's what
the market can bear -- there are a lot of rich people chasing only a few
scarce franchises.  Same goes for Monets.  There's nothing inherently
"worth" $10 million about an impressionist painting other than that that's
what people will pay for it.    

If I have $100 million tied up in a baseball team earning $2.5 million after
taxes, and I could invest the same $100 million in something else to earn
$6 million after taxes, then it costs me $3.5 million a year to own a baseball
team.  (Substitute whatever numbers are appropriate.)  A Yankees or Dodgers
that shows a much greater profit has its franchise value go up so that those
owners also have $3.5 mil in opportunity costs to own their franchise.  It's
what people are willing to pay for the privilege of being a team owner.  For
some, they have side benefits that make it worth it (Ted Turner and WTBS);
for most, it's an expensive hobby that cannot be justified on financial
grounds rather than intangibles -- liking the attention/publicity; getting
your picture taken with Bobby Bonds; sheer sportsman competitiveness.
-- 
ted frank                     | thf2@ellis.uchicago.edu 
standard disclaimers          | void where prohibited
the university of chicago law school, chicago, illinois 60637