As those who know me can attest, I am sports-crazy but more specifically, baseball-crazy. One of the first things I did with my now-wife was have a baseball catch, and man, did she have a gun! We coached our boys in Little League until they became hard-core travel ball players, and ultimately part of six state championship teams with the Poly Prep Blue Devils in Bay Ridge, Brooklyn. We followed our beloved Michigan Wolverines to Omaha when we faced off against Vanderbilt in the CWS Finals, and are long-time denizens of Yankee Stadium. Our family is steeped in baseball culture and our love for the game is ever-present.
So when it comes to my wanting baseball back, believe me, I’m dying to see players across the MLB take the field — safely — and to see their uniforms standing out in contrast against the vast sea of meticulously mowed grass. But as a businessman, a deal-maker and a tireless proponent of the win-win, I sadly anticipated the current framing of the negotiation between the MLB owners and the MLB Players Association. I decided to share some thoughts on Twitter to get ahead of the coming sh&tstorm:
And here we are. The owners flopped a deal that perverts economic logic and fairness in order to win in the court of public opinion and to pressure the players to go along. Stripping things down to their essence, the proposal calls for players on the lowest end of pay scale to get their prorated pay based upon games played, while those at the highest end to get what amounts to 40% of their prorated salary (read: 20% of their annual contract value). So what you have here are the employees being asked to subsidize the owners — the equity owners- of the business during tough times. Not giving up their fair share, e.g., straight proration, but 60% of their fair share. As an investor for more than three decades, I have to say I’m impressed with the owner’s wanton disregard for fairness and the willingness to create the most hostile dynamic possible with their most valuable assets - the players - and using a sports-starved public as a battering ram to have their highly compensated employees look like selfish a**holes. I am impressed — and aghast.
Now here’s the important part: take a deep breath, divorce yourself from the sums involved and think about principle. It’s hard, but it’s really important if we’re to understand what’s really going on here, and to allow our feelings to migrate to the party who is acting in good faith vs. the one who is using framing and context to manipulate and to avoid focusing on the facts. The owners of baseball clubs own the equity. The club and all of the cash flows associated with its operation are its assets. When someone owns equity, they’re supposed to get the benefit of an increase in asset value, and to bear the loss of a decrease in asset value. With the steady rise in TV revenues and sweetheart stadium deals, team values have generally skyrocketed. During COVID-19, there has been a short-term hit to asset value as ticket sales, ad revenues, merchandise sales, etc. have slowed to a trickle. The owners have fixed costs (like stadium leases and/or maintenance, supporting the farm system and supposedly player contracts) that need to be covered regardless of revenues, so on a cash flow basis the lack of baseball is costing them real cash. But guess what — this is what being an equity owner is — benefiting from the ups but paying for the downs. But that’s not what the owners want — they want their highly compensated employees to cushion the blow, without any return for what is an implicit financing of the owners by these players.
While I am sympathetic to the short-term pain being felt by the owners, they are dealing in bad faith with the engine of value that drives the worth of their franchises. Let’s start with proration as a fair model (separate from whether the players might be actually due more than this per contract). Things are fair at the bottom of the pay scale, but become progressively less fair as salaries rise. There is a calculable dollar value of straight proration vs. the owner’s offer, and this is the amount of financing that owners are implicitly asking the highly compensated players to provide. There are four ways owners could in good faith deal with this amount, yet they’ve chosen an alternative route (so far):
- Negotiate with the MLBPA to provide player incentives that yield an attractive market-rate return in exchange for some amount of give-up relative to straight pro-ration;
- Get a bank loan secured by the team to fund the gap;
- Issue a structured debt instrument to a private equity firm or debt fund if senior borrowing capacity (e.g., a bank loan) can’t be secured; or
- Sell part of the team.
This is the way things work in the real business world, the world I’ve been living in for 30+ years. Baseball, however, is different. It operates in this weird area of being a monopoly that is given a free pass on antitrust grounds, which shouldn’t impact the analysis but merely highlights how impervious the owners feel to logic and fairness even when the right answer is staring them in the face. I really hope someone on the owner’s side wakes up and realizes the damage they can do to the game, the partnership with players and, quite honestly, civil discourse. If America’s Game can’t set an example for how to deal with adversity with fairness, class and equanimity, then where the hell are we, really?
Signed, a Baseball Fan.