In the wake of professional crazy man Donald Sterling’s fall from the top we’ve watched a bidding war erupt over selling the Los Angeles Clippers. Retired Microsoft CEO, and at times crazy person himself, Steve Ballmer won the bidding war with a whopping price of $2 billion, cash. Just a few months ago the Milwaukee Bucks sold for a tick over $500 million, a quarter what the Clippers went for. The NBA has a monopoly on professional basketball in the United States, and TV revenue is a large source of NBA income. So how do you figure out what an appropriate price is for a team?
Valuing a basketball team is no different than valuing a company, or a stock. It is worth the present value of how much you think the thing will make from now into the future. The two main drivers of the valuation are assumptions: your required return on investment and what you think that future income will look like. Almost everyone has their own minimum return needs so there’s not much to discuss there. The real debate is the future income. With a monopoly on professional basketball, income is as reliable as the fans are. And with leagues like the NFL and NBA, that’s pretty reliable. There is a new TV contract that will be negotiated in the next few years, which could bring in boatloads more cash, and the Clippers are getting more popular. But the truth is, most reasonable assumptions about these cash flows value the Clippers at well less than $1 billion. So what was Ballmer thinking?
First and foremost, Ballmer had a reputation for overpaying for things at Microsoft. This included multibillion dollar acquisitions of Skype, Nokia, and other firms. Second, Ballmer is retired and probably bored. Billionaires like to have fun toys to play with. Richard Branson has his spaceship, Elon Musk has his electric car, (Microsoft alum) Paul Allen has yachts and two sports teams, and now Ballmer has the Clippers. Who can blame them? Part of being billionaires like these people is the legacy that comes with it. While Bill Gates is building a legacy as a humanitarian, we can hardly expect everyone to devote themselves in the same way (I wouldn’t). Owning the Clippers would give Steve Ballmer that shiny new toy he’s been looking for in retirement. And while the return on investment probably won’t be so hot compared to where he could have parked his money, we won’t know for many years whether or not that’s true.
Read: Experts puzzle over $2-billion bid for Clippers (LA Times)