Skip to comments.Why Steve Ballmer Overpaid for the L.A. Clippers: It's Not About Money Any more
Posted on 05/31/2014 10:52:18 AM PDT by SeekAndFind
Before former Microsoft (NASDAQ: MSFT ) CEO's just-announced deal to purchase the Los Angeles Clippers, the previous record high price for an NBA team was the $550 million paid earlier this month for the Milwaukee Bucks.
The amount Ballmer is paying makes it look like former Bucks owner Herb Kohl had his pocket picked by new owners Wesley Edens and Marc Lasry. Yes, Milwaukee is the fifth smallest market in the NBA, but it's hard to imagine that being the second most important team in Los Angeles is actually worth nearly $1.5 billion more.
When the Bucks deal was announced in mid-April many thought Edens and Lasry were over-paying for the team. The annual Forbes list of NBA team values, which came out in January, had the franchise ranked as the least valuable in the league at $405 million. The Clippers ranked 13th on that list with an estimated value of $575 million. So the Bucks sold for a 135% premium while the Clippers commanded 375% of their estimated value.
That's a huge multiple, which could change how sports franchises are valued. Previously it was not uncommon for teams to sell for more than their estimated worth, but the Clippers deal suggests that major sports franchises are the new status symbol for billionaires. Making money off a team or even being able to sell it for more than you bought it is not the point. The Clippers now join a growing list of teams being bought as toys by owners rich enough to pay pretty much any price.
How did the price get this high?
Ballmer, who is worth an estimated $20 billion, certainly can afford to buy any toy he wants. He also has enough money to outbid himself for the team just to make sure Shelley Sterling -- who was negotiating the sale on behalf of her family in a very complicated arrangement that is likely to end up in court -- chose his bid.
Ballmer, who was rebuffed in a bid to buy the Sacramento Kings to relocate them to Seattle despite being the highest bidder, left little to chance this time. The other bidders for the Clippers included Los Angeles-based investors Tony Ressler and Bruce Karsh, and a group that included David Geffen and executives from the Guggenheim Group, the Chicago-based owner of the Los Angeles Dodgers. The Geffen group offered $1.6 billion and the Ressler-Karsh group $1.2 billion.
Ballmer's bid was clearly designed to blow the others out the water. Basketball teams rarely come up for sale and Ballmer likes basketball enough that it was worth not only paying more than three times the estimated value of the team, but bidding $400 million more than his closest competitor.
What should the Clippers sell for?
The Clippers are profitable but only mildly so. According to Forbes, the team has revenue of $128 million and player expenses of $80 million. Add in other operating costs (like coach Doc Rivers' $7 million a year deal) and the team has an operating profit of $15 million. In theory Ballmer -- likely a better executive than previous operating owner Donald Sterling -- can wring out some extra profits.
The opportunities to do that, however, are somewhat limited. The team has a long-term lease with the Staples Center that runs through the 2023-24 season. The biggest chance to increase revenue is likely through negotiating an extension of the team's local television deal. The current deal with Fox's (NASDAQ: FOX) Prime Ticket service pays around $25 million a year. That number could go much higher as the Los Angeles Lakers, which share the Staples Center with the Clippers, have a $3 billion, 20-year deal with Time Warner Cable (NYSE: TWC). That's an average of $150 million per season.
The Lakers, however, are the more established team drawing better television ratings despite being much worse on the court for the past two seasons. Last season, the Lakers averaged a 2.15 household rating, or 122,000 households per game. The Clippers only averaged a 1.25 rating or 71,000 households per game, The Los Angeles Times reported.
Still Ballmer can likely expect a bigger deal. The Times suggested a figure closer to the $65 million a year the Boston Celtics are getting from Comcast (NASDAQ: CMCSA) would be a reasonable guess. At that number the team would add $35 million a year in profit. Let's assume Ballmer's touch can eke out another $5 million and the Clippers would pull in an annual profit of $55 million a year. Under that scenario it will take Ballmer nearly 40 years to see a return on his investment.
It's not about money any more
Most NBA owners have been content to earn a small operating profit, scoring the real windfall when they sell their team. That is certainly the case for Donald Sterling who paid $12.5 million for the team in 1981.
It seems unlikely that Ballmer will see a similar 15,900% return on his investment when he ultimately sells. But it's clear that purchasing the Clippers is not a business decision, it's an emotional one by a man who has professed his love for the sport. Ballmer did not buy the Clippers so he could get even richer. He bought them because owning a basketball team is a more enjoyable way to spend his post-Microsoft days than playing a lot of golf.
This deal will likely set a precedent that makes the value of sports franchises more about how many billionaires want in than any financial metrics.
-- Daniel Kline is long Microsoft. He is a Boston Celtics fan. The Motley Fool owns shares of Microsoft.
Move it to Seattle?
The reason of course is that Ballmer is a racist White bastard who would pay any amount to keep the team from falling into Black ownership! Well that’s what I heard from Al and Jesse.
I doubt that he will move the team to Seattle as the opportunity to recover his two billion dollar expenditure would not exist as it might in LA.
We've left free market economics behind. Now it's about power and emotion, just as it was in the age of the Monarchs. Some people don't have to "make money" and they turn their nose up at "profit". They simply "have" money and privilege. They are at the top, and their children will be at the top. It's just the way it's meant to be.
Now, back to the fields you serfs! There is work to be done! Your masters are hungry.
Sterling laughing all the way to the bank. And his opposition to the sale? Just laying groundwork for (a) proving it was a forced sale because of the ginormous tax ramifications (probably about $300 or so million worth) and (b) his lawyers to sue the crud out of everyone.
These idiots have been played by the Sterlings. It’s so obvious - except to agenda driven leftist idiots...
He has long wanted a basketball team and this was his chance to get one, pure and simple. So he overpaid, good on him. It’s his hobby and his money and if this was what he wanted, more power to him. Why try to create a conspiracy where there is not one? Think of classic cars, people overpay for them all the time because it’s about the emotion and not the price. M2C.
“Ballmer, who is worth an estimated $20 billion, certainly can afford to buy any toy he wants.”
Hello liberals! Rich guy playing again, where’s the complaining?
and put all team employees on minimum wage
I thought the NY Yankees were the most valuable sports franchise in the country at 1.9 billion. Seems like he paid way to much.
New car, caviar, four star daydream,
Think I’ll buy me a basketball team.
As far as the price of the Clippers? I stated this on a previous thread: it's not unusual for a guy with a mid-life crisis to spend 10% (or more) of his life savings to get his favorite toy.
And meanwhile, the Sterlings can have some lawsuit fun with the NBA and others involved, if they want. And the owners won't have to worry about the repurcussions of a vote and a fear of someone going after their teams for the crime of being imperfect.
Or bring in some H-1B’s.
He’d better make a real big splash, because even though the Lakers are down, they are still LA’s team.
That’s why I expect Ballmer to go hard after LeBron James in the off season.
I remember when the Celtics went public.
Turned out to be an accounting nightmare as many of the fans that bought shares, especially a single share, framed, rather than cashed, the dividend checks.
Obviously that implies that the same fans took possession of the stock certificates...which were probably also framed.
The whole idea of paying that much is ludicrous. The fans are the ones that are going to suffer from inflated ticket and concession prices.
For some reason, Seattle is not a basketball city.
“Why does anyone do anything?”
“I don’t know, I was really drunk at the time!”