The fate of the Los Angeles Clippers depends on the result of Donald Sterling's various legal maneuvers, but there's no doubt that prospective owner Steve Ballmer's bid of $2 billion is very real. The former Microsoft CEO, who at one point looked set to bring the NBA back to Seattle, has committed nearly three times the amount of the league's previous record sale to lead the Clippers into a new era. It's a serious figure for a franchise that was once derided as the worst-run organization in American sports.
While the sheer amount of money at play grabbed a lot of attention, $2 billion was not considered terribly unreasonable for a franchise with so much potential in the NBA's second-biggest market. Yet the bid book of the sale, put together by Bank of America, suggests that the eventual price represented a massive over-valuation from Ballmer. Ramona Shelburne and Darren Rovell of ESPN.com got their hands on the figures:
Ballmer's $2 billion final bid is 12.1 times the expected 2014 revenues of the team, according to the numbers given to the bidders by Bank of America, which conducted the sale on behalf of the Sterling trust. The document was introduced into court Tuesday and subsequently obtained by ESPN. A person with knowledge of the sale confirmed that bidders were given these documents. [...]
Valuation multiples are usually based on total revenues, so the $164.9 million before player costs are extracted equals more than 12 times less than the $2 billion sale price.
"No team in the history of sports has sold for six times total revenues, so that should give you an idea of how crazy this purchase price is," said a sports banker who was not involved in the transaction.
Even according to Bank of America, no team has been purchased for more than five times its total revenues. Before the bidding began, Bank of America valued the Clippers between $1 billion and $1.3 billion, double the $550 million sale price of the Milwaukee Bucks, which had set a league record for a sale price just months before. The document cites a five-year mean of teams that have been purchased during that time at a sales price of 3.4 times total revenue. Bank of America's projection was more in line with the two bids under Ballmer's, which came in at $1.2 billion and $1.6 billion.
"Whether you want to call it a slam dunk or a home run, none of us believed that we would get to $2 billion," Bank of America expert Anwar Zakkour testified in court Tuesday. "None of us even believed we'd get to the $1.8 billion number, so that says it all."
To put this supposed overvaluation in other terms, Ballmer's eventual bid could have covered the high-end Bank of America valuation of $1.3 billion, the Bucks' record sale price of $550 million, and more than one-third of the $403 million he and investor Chris Hansen offered for 65 percent of the Sacramento Kings last January. (Keep in mind that the Bucks and Kings were both considered overvalued themselves at those prices.) The lesson, other than that Ballmer has obscene amounts of money, is that he may have let his desire to own an NBA team get in the way of a sound business deal.
At the same time, it's arguable that Bank of America undervalued the Clippers. While revenues have previously been considered a reasonable way to value a franchise's worth, this particular team is a special case given years of apparent mismanagement by Sterling and his cohort, a pending national TV deal likely increasing the value of every NBA franchise to considerable effect, and the Clippers improving on the court to such a degree that they could become one of more popular teams in the league. While it's unlikely that they will ever be able to challenge the Lakers for dominance in Los Angeles — a half-century of near-uninterrupted contention has a way of entrenching loyalties — it's not absurd to think that the Clippers will boost revenues to lower that multiple from 12 to something closer to six (if not right there, which does seem rather unlikely).
On top of this future-oriented interpretation of the bid, it's worth considering if a bidding process such as this one should be looked at like any old business deal. It's easy to argue that Ballmer overpaid, but he also likely wanted to ensure he would win. Teams like the Clippers — a title contender in one of the biggest markets in the NBA and world — simply don't go on sale very often, if ever. It's possible that Ballmer was willing to pay any price short of something truly outrageous (like, say $3 billion, if we're guessing) to become owner of the Clippers. Plus, this sale process was an outlier in a league already full of outlying businesses. The NBA limits the supply of teams, and a growing crop of fantastically rich buyers considers it fun to serve as an owner. In such a situation, why wouldn't every team sell more much more than its logical valuation? It seems likely that Ballmer has signaled the future of team valuations relative to revenue.
Ballmer's bid does seem a little nuts, which is surely part of why current Clippers CEO Richard Parsons testified that the team may not reach the same figure if this sale is voided. However, given the course of NBA franchise sales in recent years, it may be more prudent to expect ever-increasing prices. It only takes one buyer to set a new standard and turn prior logic into the marker of an outdated mindset.
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