Posted by Sean Doyle on June 10, 2014
Investing Legend Benjamin Graham was famous for saying "price is what you pay, value is what you get." This past week ex-Microsoft big Steve "Bald Savage" Ballmer blew the top off the sports franchise valuation market by dropping 2 yard on the LA Clippers. We know now the price Ballmer paid, but what exactly is the value of what he got?
Think of it, just a month back the smart set chastised Wes Edens and Marc Lasry for laying out a then-record $550 million to purchase the lowly Milwaukee Bucks. Now ask yourself how much have the Bucks appreciated in just the last few days? Two hundred million? Three? Four (gulp)?? When the smart money gets dumb, and the dumb money gets lucky, you know we are entering a whole new paradigm.*(1)
Value is, of course, an elusive concept. Merriam-Webster defines it as "a fair return or exchange in goods, services, or money for something exchanged." Ok. Vague, but decipherable. Perhaps however, a degree of ambiguity is necessary when dealing with such a subjective abstraction as "value." After all, isn't one man's trash another man's treasure?
Over the last four decades there was perhaps no sports franchise as synonymous with "trash" as the Los Angeles Clippers. Under Donald Sterling's horrid stewardship the team managed just 7 postseason appearances in 33 years. (And this in a league where half the teams make the playoffs annually, and many of them with losing records. ) What's worse, the Clips only had five winning seasons total over that time span. There were so inconsequential that I didn't even realize that LA had two professional basketball teams until 1996. *(2)
Despite their legendary ineptitude, despite being owned by an aloof racist brand-destroying slum lord, despite not even being the most popular basketball team in their home arena, the Clippers just got sold for a number near equal to the Gross Domestic Product of Guam! How did this happen?
Like many of his Forbes 400 contemporaries, Steve Ballmer had long desired to be the owner of a major American sports franchise. He watched in quiet admiration as fellow Mister Softee*(3) alum Paul Allen crafted a sterling*(4) reputation as an NBA owner with the Portland Trailblazers (19 playoff appearances in 26 seasons) and NFL owner with the Seattle Seahawks (reigning Super Bowl champions). Ballmer whiffed in his prior two attempts to enter the owner's box with the Sonics in 2008, and the Kings in 2012. He was not going to be denied a third time.
However, Ballmer's quest was about more than just entering the "world's most exclusive club," for he had posterity on the brain. Donald Sterling's anti-black screed crafted a truly unique scenario, a narrative imperative just screaming for a hero to ride in and save the day. Oprah Winfrey, David Geffen, and Larry Ellison all lined up to play the protagonist opposite Sterling's reviled antagonist. How much would they pay for that white horse? What exactly is the hero's premium? Well, we all found out when Steve Ballmer outbid them all, paying three times the fair market price for his glory steed. He won the Clipper auction, thus securing for himself a favorable piece of American history, and in doing so he turned the entire sports industrial complex on it's head. (See chart below)
Ultimately this all comes back to the notion of value. What is of true value to a man like Steve Ballmer with net worth of $20 billion dollars? With a bankroll like that, he could buy almost every team in the NHL, and still have enough leftover to go private island shopping. No, this purchase is all about reputation. It is the one thing even the richest amongst us (Donald Sterling), can't salvage once it's sullied. Steve Ballmer is well known and highly regarded on both Wall Street and Silicon Valley, but he is hardly a household name. With one stroke of the pen he has entered the collective psyche of the American public, colored bright with a hero's glow. But, it's what he does next that will show if he creates any value for the Los Angeles Clippers. The hard part starts now.
(1) I'll leave it to you to guess who I meant. Or perhaps I meant nothing, and was merely being rhetorically clever. Or not.
(2) Admittedly, I was a casual fan of The Association from the late eighties until the early nineties, but still.
(3) This is old stock trader lingo. Mister Softee is a nickname for MSFT, Microsoft's stock ticker.
(4) See what I did there? Of all the aspirational WASPy surnames that Donald Tokowitz could have possibly chosen, it is a delicious irony that he picked a word so completely antithetical to his own character.