Balmer Basketball

A couple billion here, a couple billion there, and pretty soon we’re talking about real money. This logic applies in the real world, but often different rules apply in the tech sector. As we’ve noted when when Facebook, Google, or Apple makes a multi-billion dollar acquisition, the largest of tech companies use entirely different math to determine what makes a good deal.

But with all this wealth being created in the technology sector, it’s not just companies that are able to write ten-figure checks. Now executives, even some who didn’t found their companies, are moving major money around.

The latest example of this came on Friday, as news leaked that former Microsoft CEO Steve Ballmer is likely to be the new owner of the Los Angeles Clippers basketball team. The price tag? A stout $2 billion. Ballmer didn’t even put together an ownership group, as is customary in these situations, and is not expected to take on debt to complete the deal. Rather, the man to whom Forbes ascribes a net worth of $21 billion (34th in the world) is expected to write a check, or back up a 747 stuffed with cash, or do whatever it is people do when deals of this size go down.

This raises a number of interesting questions. First, is buying the Clippers at what amounts to a historic valuation, a savvy investment? Second, what’s the likelihood that other technology billionaires follow Ballmer’s lead and go shopping for new sports franchise logos?

The reported $2 billion price tag is nearly four-times more than anyone has ever paid for an NBA franchise – the Milwaukee Bucks were acquired in April by two hedge fund titans for a then record, but still paltry-by-comparison sum of$550 million. In fact, Ballmer will pay 42 percent more than the value Forbes placed on the league’s most valuable franchise, the New York Knicks ($1.4 billion), in January and a whopping 247 percent above the $575 billion it deemed the Clippers worth at the time.

Is any of this all that surprising in an era where Facebook paid $19 billion for Whatsapp, Google reportedly offered $3 billion-plus for 18-month-old Snapchat, and Instagram doubled its valuation in a matter of weeks between its Series B round and subsequent acquisition by Facebook?

To dig a little deeper, the Clippers, as the No. 13 most valuable franchise at the time, generated $128 million in 2013 revenue (also ranking 13th league-wide) and 19.2 million in operating income against no debt, while seeing its value climb 34 percent in year-over-year rankings.

Zooming out, the Clippers didn’t rank among the world’s 50 most valuable sports franchises according to a January Forbes report. Coming in at number 50 on that list was the Oakland Raiders football team at a value of $785 million, 36 percent more than the Clippers and barely 20 percent the value of the No. 1 ranked Real Madrid soccer team. At the Ballmer valuation, the Clippers would now be ranked No. 6 worldwide (assuming all other valuations remained the same), immediately ahead of the New England Patriots at $1.635 billion and behind the Dallas Cowboys at $2.1 billion.

None of this should suggest that the Clippers — who have never won a championship, are the second tier basketball team in their hometown (and their home arena), and have no marquee local television contract — are worth more than the Patriots. So the question is, did Ballmer overpay, or are recently published Forbes valuations out of whack?

Former Sacramento Kings owner Joe Maloof recently told the LA Times that Ballmer overpaid for the Clippers, but added:

He made a wonderful deal. These teams are rare gems. Owning a sports franchise in today’s world is a very secure investment. They always appreciate in value. Even if he may have paid too much in the short term, he got a bargain. This is a tremendous market, and it’s growing.

While using the word “always” around investment returns is dangerous territory, history remains in Maloof’s favor, and Ballmer’s.

Disgraced former Clippers owner Donald Sterling bought the team — then based in San Diego — for $12.5 million in 1981 (roughly $32 million in 2014 dollars). He saw a 16,000 percent cash-on-cash return on his investment (ignoring inflation and any additional capital he likely put into the team), assuming the Ballmer deal goes through as reported.

By comparison, Jerry Buss bought the Lakers in 1979 for $67.5 million, George Steinbrenner purchased the Yankees in 1973 for $10 million, and Jerry Jones purchased the Dallas Cowboys in 1989 for $140 million. All three franchises are now worth north of $1.3 billion, even by Forbes’ seemingly conservative estimates. Finally, the nearby Dodgers, which have the benefits of being the number one MLB team in Los Angeles (aspirational renaming of the Los Angeles Angels of Anaheim notwithstanding) and a mega-TV local deal, were recently sold for $2.15 billion, suggesting some precedent for Ballmer’s Clippers offer.

The big question is how much upside remains? Eventually, the law of large numbers kicks in making it unlikely that these teams can see the same type of 100-fold increase in value over the next three decades — that is, unless we start beaming live game coverage elsewhere in the galaxy. But Ballmer doesn’t need to sell the Clippers for $200 billion to make this a savvy move. With plenty of money in the bank and newfound free time in his calendar, a modest increase in value, coupled with the enjoyment and prestige of owning a pro sports team, will likely be enough to chalk this deal up as a win.

Plus, the Clippers’ modest $18 million per year TV contract is up for renewal this year, and some estimates have that income stream growing to as much as $60 million. With TV representing 40 percent of Clippers revenue today, such a deal could increase the team’s total revenue by more than 93 percent. Ballmer also stands to benefit from a renegotiation of the league-wide TV national deal coming in 2016.

It wouldn’t be surprising to see a few more tech billionaires join Ballmer, as well as Dallas Mavericks owner Mark Cuban, Seattle Seahawks and Portland Trailblazers owner Paul Allen, Cleveland Cavaliers owner Dan Gilbert, and former Sacramento King owners Gavin and Joe Maloof in the pro sports owners box. Oracle’s Larry Ellison, a famed sports enthusiast in his own right, was among those reportedly willing to pay $1.6 billion for the Clippers before getting outbid. There are surely others who could afford to write a similar check either on their own or as part of a syndicate.

With the value of sports franchises seemingly at an all-time high, you’d have to imagine that a number of long-time owners are similarly contemplating now is a great time to sell. In the NBA alone, there are 17 other teams that Forbes valued at less than the Clippers’ then-$575 million price tag, with the Bucks bringing up the rear at $405 million months before selling for a price 36 percent higher. By Ballmer-math, the NBA’s then 29th-least valuable team, the Charlotte Bobcats, would be worth $1.422 billion (247 percent more than their stated $410 million value). Say nothing of all the NFL, MBL, MLS, and European Soccer teams that all stand to benefit from this latest “sales comp.”

Ellison may not have won the Clippers deal, but it was just a year ago that he bought 98 percent of a Hawaiian island for between $500 million and $600 million. For all the talk of a bubble in tech startups, we may be about to enter a period of overzealous spending by tech celebrities outside of the digital world. And as crazy as these numbers sound, sports teams, like tropical islands, are a scarce resource. Even at $2 billion, they’re likely to be the kind of investment that pays major dividends.

[Image via Globalflare]