Sunday, March 01, 2009

Manny NPV'ing Manny

I beg to differ, at least partially, from Sax. Great minds don't always think alike. And in this case, neither do ours. Please allow me to explain my reasoning:

Now, McCourt-bashing may be addictive, often deserved, and good for the soul, but he obviously understands the time value of money. After all, that's precisely why the deferrals are in there to begin with, right? So let's look at his latest offer as objectively and hyperbole-free as possible, and I think you might see it's not an idiot's spawn after all (the shadiness with how it was communicated in the initial press release, on the other hand, may have been).

Specifically, let's compare this latest offer to the two other relevant offers:

  • The original 2-year $45 million offer (with no player option) made back in November, and
  • The 'phantom' 2-year $45 million offer without deferred payments that McCourt apparently wanted us to believe he made.

And to make sure we're not pulling a Plaschke by passing judgment based on misinformation, let's establish the facts on each offer up front (please verify and correct if necessary, and I will recalculate):

November Offer:
  • $15 million in 2009
  • $22.5 million + 7.5 million in 2010
  • No player exit option
'Phantom' Offer (i.e., what McCourt may have hoped we'd think he offered):
  • $25 million in 2009
  • Player option for $20 million more in 2010
Actual Offer:
  • $10 million in 2009, and...
...after 2009, player has two options:
  • He can exit, in which case he gets paid $15 million more sometime between 2010 to 2013; or
  • He can stay, in which case he gets $35 million more, as follows:
    • $10 million in 2010
    • $10 million in 2011
    • $10 million in 2012
    • $5 million in 2013

Are we all in agreement so far?

Now, two more things before we NPV these bad boys to determine their true present value:

  • I don't know what discount rate Boras is using to come up with his valuations, but thanks to a heads up from commenter ken, we'll use the fed's official risk-free rate of 3.8%.
  • I'm assuming payments are made at the beginning of each year. Don't know if this is true, but as long as this assumption is used across all three offers, it's apples-to-apples.

So here we go:

  • November Offer value: $43.9m
  • Phantom Offer value: $44.3m
  • Actual Offer value: $42.2m. If Manny's tax rate increases from 35% to 39.6% after 2010, this reduces the equivalent pre-tax value to around $40.6m*.

So this tells me that:

  • The Actual Offer is worth around $2.1 to $3.7 million less (depending on what happens with tax rates) than what Frank might have been hoping we'd believe (i.e., the Phantom offer). Shame on you Frank if you thought you could invoke the "I did all I could" card without fans understanding the deferred payment impacts. While I personally think you've already done more than you should to sign Manny, don't misrepresent what had been offered.
  • On the other hand, the analysis also tells me that, when contrasted with the November Offer, McCourt is essentially offering a player's option exit clause in exchange for $1.7 to $3.3 million (again, depending on tax rate changes). Considering there are no other serious bidders, it seems very reasonable to me (hey, if the Giants or anyone else wants to pay what Boras wants, be my guest).

In anycase, Frank, please stand pat and don't capitulate to Boras' latest counteroffer. Why let him dictate terms when he has no leverage? You know what I want you to do. Nonetheless, I know emotion usually trumps all, so I suspect Kelly Clarkson and I will be met with a lot of disagreement. Let's hear it.

*offer is worth approx $24 million if he exits after 2009, depending on when the additional $15 million is paid.


ken said...

Very close

The official published "Risk Free" rate of return is currently 3.80%

Eric Karros said...

Ah, thanks Ken. Even better. I will adjust accordingly.

Steve Sax said...

Nice job EK. The only thing I'm not sure of is if Manny would receive $15M more if he chooses to execute the option after year 1 and exit the deal. According to Dylan Hernandez, the deal was:

Under the terms of the contract that Ramirez was offered by the Dodgers on Wednesday, he would have received $10 million this year. And by exercising the option for the second year of the deal, he would've received $10 million in 2010.

Ramirez would have been paid the remaining $25 million over the next three years without any added interest. He would've received $10 million in 2011, $10 million in 2012 and $5 million in 2013.

I was listening to sports talk radio out here in LA (I know, not the most reliable source) and they said that if Manny walked after year 1, it was only the $10M which was guaranteed him; the other $35M in the deal was contingent upon him picking up the option. Not sure if this was accurate, or if more info came out subsequently, or what.

Orel said...

Finally, Kelly Clarkson and Scott Boras in the same blog post. About time.

Eric Karros said...

Yeah, I found it hard to get clarity on specifics of the exit clause. If it is indeed only $10 million, then the exit clause is meaningless and McCourt's spin on how he "really listened to what Boras wanted" or whatever he said seems more disingenuous. If this is the case, this offer boils down to the same deal as back in November but with 5-6% less money. Given how the Manny market has dropped since then, that seems fair to me from a pure numbers standpoint, but they should have known it'd never be accepted and damages the process.

If it is only $10 million for the 1 year option, it seems like making the offer at all was just a doomed PR play.

Anyways, from here on out I'm going to try to stop caring about what happens with this.

StolenMonkey86 said...

Don't forget that salary after 2010 will be taxed higher too. I found the exception to rule 5.

Eric Karros said...

StolenMonkey - an assumption that Manny's tax rate increases from 35% to 39.6% after 2010 is already included in the analysis.