From: kbanaian@bernard.pitzer.claremont.edu (King Banaian)
Newsgroups: rec.sport.baseball
Subject: Re: Why Owners Buy Teams
Keywords: Independent auditors, fraud, finances
Date: 20 Dec 92 20:54:54 GMT
Organization: Pitzer College

In article <1992Dec19.204240.17854@midway.uchicago.edu> thf2@ellis.uchicago.edu (Ted Frank) writes:

{For those just tuning in, Ted and I have had a little debate here over some 
data I posted from Financial World on expenses and revenues for sports 
franchises.  Ted disagreed with those numbers;  in particular the non-player 
expense numbers were exactly the same as the player expense figures.  I call 
them estimates;  he calls them cookery.  If interested, see threads "
Basball finances query" and "Doubting Thomases".  We have now moved on to a 
discussion of how team franchise values are calculated.  Let's listen in:  
I'm the guy with >>, and he's the >.}

>>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.
>
An owner makes money four ways:  S/he can call it profits and pay taxes;  
s/he can make a "loan" to the corporation and collect interest (the loan is 
made at time of purchase and is a way to insure a cash flow back to the 
buyer), s/he can pay her/himself a salary, and s/he can cover cash flow by a 
generous amortization schedule for the assets of the corporation.  The 
latter three are expenses.  Using operating income as the measure can only 
partially compensate for this;  it freezes out the depreciation and probably 
also the interest payments, but the salary figures remain.  So using a 
multiplier on profits does not work, since the owner has broad latitude over 
what is called "profit" and what is called "expense".

>>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 impact of owning other businesses, IMO, is to give the depreciation 
expenses some other income to shelter.  So Veeck and Griffith would lose 
that addition to their cash flow.


>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. 

But this is not the after tax return.  The depreciation covers a lot of 
income, and the interest and salaries generate more.  Robert Bartley from 
the _Wall Street Journal_ wrote recently, "Profits are that part of a firm's 
cash flow that a government chooses to tax."  Beware which definition of 
profit you use here.

>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.

That's why the multiplier for revenues is 2.0.  In more stable basketball, 
it's 2.4.  Clearly an example of how economic forces drive franchise values.

>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.    
>
What was that phrase, "Pshaw.  Poppycock."?  One of the nice things about 
Monets is that Monet is dead -- there can be no more Monets painted.  
Franchises can be created at will.  A Monet is a surer store of value.  I 
will agree that some people buy them to put up in their studies to look at, 
but I'll wager that the far greater number are stored, and stored well, to 
serve as an investment vehicle.  (Why did Christies and Sotheby's suffer so 
during the last recession?)  When more franchises are generated, their value 
goes down.  When the world refuses to look much at your Monets anymore, 
their value goes down.  When fans stop watching baseball, their value goes 
down.

>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.

Clearly, the people who like owning sports teams most end up with them, 
because they will be willing to pay the most.  But when you buy a toy, don't 
you act rationally, paying the lowest price the seller will take?  Don't you 
then treat it like an investment?  

{Readers, I'm done with this thread.  Ted, the last word is yours.}
Newsgroups: rec.sport.baseball