A few billion dollars just doesn’t stretch as far as it used to anymore. Over the past couple of weeks, one tech titan has announced they are willing to buy a fancy headphones company for over $3 billion, and then Microsoft’s Steve Ballmer went and shocked the sports world by forking over $2 billion for a basketball team that has spent most of the past three decades as the laughingstock of the league.
By conventional standards Mr. Ballmer’s purchase looks like a terrible business decision. Financial critics of the deal will site the fact that his team has a terrible history, plays second fiddle within their own city to one of the most successful franchises in the world (L.A. Lakers), and just doesn’t make that much money. Several people have made this exact argument.
Last year Forbes had the Clippers franchise valued at $575 million with an annual profit of about $15 million. If you value the Clippers using conventional methods, 12x earnings would be about $180 million. In case you were wondering, it also means that Ballmer bought the Clippers for roughly 133x earnings! Even if you factor in a major increase in profitability, the multiples still don’t initially make sense. On the surface this looks like a terrible investment. Here are seven reasons why experts and conventional wisdom has no place in this conversation:
1) Buying a professional basketball team in LA isn’t about the value of investment. Being the big shot sitting courtside and the man everyone calls when they want an entertainment favour is priceless for someone of Ballmer’s wealth. I imagine that when your net worth is in the $20 billion neighborhood, most of your purchases have some element of ego to them as anything that made you more materially comfortable was long ago purchased. Anyone can buy/custom-build a massive yacht or the newest super-sports car. Islands and private jets are probably blasé amongst the ultra-elite. Only 30 people/groups can own a franchise in the greatest basketball league on the planet. What other toy will have people worship you in the manner of adoring pro sports fans? What other toy gives you the chance to hang out with and get your butt kissed by some of the biggest pop culture icons in the world?
2) Ballmer gets to be the white knight who rides in on an unprecedented wave of goodwill after “rescuing” the team from one of the worst owners in professional sports history. Everyone, including the LA and national media will be cheering for this team for at least the first few years just based on that goodwill. The franchise is now world famous (any news is good news) and everyone will be watching going forward.
3) Ballmer has the assets and connections to make this a multi-level deal. Anyone want to bet against Google getting into the livestreaming of basketball games? How about Ballmer going all in and spending another $1-$1.5 billion on a new arena in prime LA real estate? I’m not sure what the final game plan is, but with the amount of capital he has (and access to other rich friends’ capital) I don’t think anything is out of reach if he wants to create a true legacy brand.
4) You can’t put a value on the long-term competitive advantages of owning a LA sports team. The hometown discount players will be willing to take in order to maximize their crossover exposure outside of athletics is considerable. Want to entice a free agent to come be worshipped in your city? Show them Hollywood, beautiful views, gorgeous weather, and people that are so pretty they make you forget about the former considerations. There is a reason why Wayne Gretzky doesn’t live in Edmonton or the GTA where he grew up – instead he and his family became addicted to LA.
5) The team is really good! The Clippers currently have 2 of the top 15 – maybe top 10 – players in the world. Chris Paul is a once-in-generation point guard and Blake Griffin is perhaps the second most highlight-worthy player in the NBA. They also have a coach in Doc Rivers who is commonly considered amongst the top 5-7 people in the profession. This team has a lot of good assets and will be extremely competitive for at least the next few years.
6) Owning an NBA franchise is about to get a lot more profitable. In case you don’t go home at night and do a little light reading on recent labour agreements let me fill you in on last round of NBA collective bargaining – the players got played. Anytime you have 30 of the world’s best businessmen/businesswomen on one side of a negotiating table and over 400 players from all backgrounds and education levels on the other, bad things are going to happen. This structural imbalance was further complicated by the fact the head of the player’s union, Billy Hunter, was on his way out amidst some pretty crazy accusations. There still hasn’t been a replacement named by the way. All of this lead to the owners getting an incredible deal and consequently owning an NBA team is now much more lucrative. When you combine this with the new media revenue possibilities across the world that are opening up over the next 10 years, I believe you will see teams begin to make $100 million profits annually fairly soon.
7) Before this whole Donald Sterling fiasco the Clippers franchise was largely irrelevant outside of playing in a big market. Now, the team is absolutely begging to be re-branded as the final piece to this whole re-birth saga. My boy Bill Simmons has some great ideas, including calling the team the Hollywood Knights. I love this moniker for a couple of reasons. First and foremost, the Lakers will be associated with LA for a long time yet. There is just too much history there. “Hollywood” gives the team a glitz and glamour feel that celebrities will love as they pay huge dollars to be seen at games. Players will love rubbing shoulders with the rich and the famous and it is the perfect way to differentiate from the Lakers. There is also some cool wordplay/branding opportunities available with the knights/nights marketing scheme.
8) There is a natural rivalry ready to begin with a reeling giant. If there was ever a time to want to take on the Goliath known as the LA Lakers franchise it is right now. Granted, it seems the purple and gold are only ever a few years away from a return to glory, but as of today they are a non-playoff team with an aging star whose best days are long behind him – but whose biggest pay cheques still lay ahead. The rivalry that could develop while the new Hollywood Knights are still elite and the Lakers are rebuilding could set the stage for a very profitable back-and-forth over the next several decades. Your telling me Ballmer is going to allow himself to get outspent after he just paid a King’s ransom (well, actually much more than a Kings’ ransom if you’re referring to the Sacramento Kings) to get into the game?
9) 25 years ago conventional wisdom said that Jerry Jones was severely overpaying for the Dallas Cowboys. In 1989 Jerry Jones paid $70 million for the team with star on their helmet. He paid another $70 million to buy Cowboys stadium. Today the team is worth over $2.3 billion! That’s an annualized return of over 14%. Not bad for an initial “overpay” on the investment opportunity. Obviously that sort of return will be difficult for Ballmer to match, but with basketball gaining sports market share around the world (one of the few American-centric sports to do so) it could be argued that this will still turn out to be a decent investment for the former Microsoft boss – even though none of that stuff really matters – the guy has more money than he’ll ever spend.
By the way, does this transaction take the record for worst/best punishment ever recorded? In 1981 the now infamous Donald Sterling bought the L.A. Clippers for the tidy sum of $12 million. That’s an annualized return of 16.77% – and returned in a pretty damn tax-efficient manner! I guess you have to factor in the $2.5 million dollar penalty levelled by NBA commissioner Adam Silver. Bet he noticed that one…