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| FILE - In this Jan. 25, 2014, photo, then-Microsoft CEO Steve Ballmer, left, shakes hands with former NBA players Bill Russell, right, and "Downtown" Freddie Brown as Omar Lee looks on during an NCAA college basketball game between Washington and Oregon State in Seattle. An individual with knowledge of negotiations to sell the Los Angeles Clippers said Shelly Sterling has reached an agreement to sell the team to Ballmer for $2 billion. The individual, who wasn’t authorized to speak publicly, told The Associated Press on Thursday, May 29, 2014, that Ballmer and the Sterling Family Trust now have a binding agreement. The deal now must be presented to the NBA. |
A high-profile NBA
franchise in a major media market was suddenly available. A handful of
power brokers from the technology, entertainment and venture capital
fields were lining up for a chance to join the party.
And
all the while the clock was ticking on the bidding, with the league
waiting and threatening to impose its will on the process if Donald and
Shelly Sterling didn't unload the Los Angeles Clippers.
The
result? A $2 billion record bid from former Microsoft executive Steve
Ballmer that sent sticker shock through the worlds of sport and finance.
The
offer, which comes after recorded racist comments made by owner Donald
Sterling prompted the NBA to force a sale of the Clippers, is among the
highest amounts ever paid for a pro sports team. It roughly ties the $2
billion paid for baseball's Los Angeles Dodgers in 2012 and exceeds the
$1.47 billion paid for soccer's Manchester United in 2005.
A perfect storm may have inflated the price.
A
small time frame to negotiate, skyrocketing television rights fees that
pushed professional sports franchise values through the roof, an
owner-friendly collective bargaining agreement negotiated in 2011 and
Ballmer's own desire to land the team after missing out in his bid to
buy the Sacramento Kings last year collided to drive the Clippers price
into the stratosphere, experts say.
"I'm
completely hornswaggled -- if that isn't a word, it should be -- by the
going price," said Michael Leeds, professor of economics at Temple
University. "It is almost unimaginable that the Clippers would go for
about the same price as the Dodgers did just a year or so ago."
Ballmer
may have overpaid for the Clippers through an economic theory called
"the winner's curse," which states that the winning bid is always the
highest bid and not necessarily the most accurate one.
But
with a meeting scheduled for Tuesday in which the NBA was expected to
vote to oust the Sterlings as owners of the Clippers, the window for
negotiating a deal was closing quickly. That can often prompt
prospective buyers to be more aggressive with their initial offers than
they normally would be, according to John Vrooman, profressor of sports
economics at Vanderbilt.
But Ballmer had good
reason to overpay, Vrooman said. The Clippers will soon be renegotiating
their local television packages. Their current deal reportedly nets
them about $20 million annually.
Thanks to the
team's recent success, star power on the roster with Blake Griffin and
Chris Paul and a voracious Los Angeles marketplace that could include
bids from three networks, the revenue gained from a new contract will be
much closer to the estimated $200 million that the Los Angeles Lakers
earn annually as part of their deal with Time Warner, Vrooman said.
On
top of that, the NBA will get a new national television contract in
2016 that figures to add another $50 million to each team's balance
sheet.
The expected television revenue alone -
not even taking into account revenue from tickets, luxury suites and
in-arena advertising - pushes the value of the Clippers to the $1.2-$1.6
billion range, Vrooman said.
"These buyers
are perhaps irrational and exuberant but not altogether foolish,"
Vrooman said. "There is method to Ballmer's `madness.'"
The
extra $400 million added to Ballmer's bid is what Vrooman called the
"blowaway factor" - additional money aimed at grabbing the seller's
immediate attention and emphatically distancing his bid from others.
"About
$1.6 billion of the price is sustainable investment and the extra $400
million may be what a billionaire owner with a Harvard degree in
economics simply wants to pay for his NBA buzz," Vrooman said.
Owning
a sports team has always been one of the ultimate status symbols, with
billionaire playboys flexing their financial muscle to purchase the
biggest, shiniest toys available. But in recent years, thanks to
resounding victories by owners over players in collective bargaining
negotiations, sports teams are getting closer to becoming fool-proof
moneymakers as well.
"You would almost have to
be the dumbest kid in class if you didn't make money on professional
sports teams today," said Red McCombs, who has owned the San Antonio
Spurs and the Minnesota Vikings in the past.
Teams
are also rarely available, and there are lots of interested buyers, so
the sales prices continue to rise. McCombs was on the front end of the
trend when he sold the Vikings, a team he purchased for $220 million in
1998, for $640 million in 2005.
McCombs made
his deal before the NFL owners won a labor battle to reduce the players'
portion of the revenue split to 50 percent in 2011, an arrangement the
NBA duplicated later that year. Reducing player salaries - the biggest
recurring expense for an owner - provided cost certainty to prospective
buyers.
"Essentially, the commissioners and
the owners have done a great job of pretty well identifying from the
cost side what their total nut is going to be on salaries," McCombs
said. "Through a lot of sweat and tears and lockouts, we have a fairly
decent feeling as to what the cost to the players is going to be."
The
rising prices have led to concerns about a bubble in the pro market
similar to the one that brought about the housing crash. Vrooman said
the lack of inventory separates pro sports from real estate.
"The
housing bubble was caused by too many houses being built whereas this
bubble is caused by too few franchises being created here and abroad,"
Vrooman said.
Ballmer, who stepped down as CEO
of Microsoft in February, may also view the purchase - which still has
to be approved by the NBA's owners - as a way to cast himself as a
savior swooping in to rescue the Clippers from Donald Sterling after the
fallout from the racist comments.
"Add to
that the fact that he is a serious basketball fan, and, again, you have a
formula for a higher-than-usual bid," Leeds said. "Still, all this
reasoning comes after the fact and does not significantly lessen my
astonishment."
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