Two arguments: one bull, one bear.
Bull Case. From Jerry
Steve Ballmer, former CEO of Microsoft ($MSFT), just reportedly paid $2 Billion to buy the Los Angeles Clipper of the National Basketball Association (NBA). To most, that sounds very pricey (especially when compared to the $575 million valuation Forbes gave them earlier this year).
In comparison, the Los Angeles Dodgers went for $2.1 billion in 2012, but that also included some TV rights and real estate. The Clippers deal is just one that includes a team; a team that has been one of the worst over the tenure of Donald Sterling’s ownership. So there’s no doubt Ballmer forked up quite a bit.
Now, I’m not going to show you why, from a basketball standpoint, Ballmer’s investment was wise (lots of things to do with TV deals and the NBA’s CBA). There are millions of basketball blogs that can and will do that. But I am going to show you why from an investment standpoint, buying the Clippers, even at a hefty price, kind of makes sense here for Ballmer.
1) The Stock Market is at all-time highs.
While valuations are not crazy, they are also not cheap or fair either. Europe, Japan no longer offer deep value plays either after multi-year runs (especially relative to their economic situations). China’s Stock Market has been dead money for the last 5 years and has crushed investors.
2) Bond yields are still stuck near historical lows.
The $FED (Federal Reserve), for now, is still keeping rates low. Even if they raise rates, you’re not going to see them go too much higher. Fixed-income investing is not too enticing right now.
3) Real Estate Is Not Super Cheap Anymore.
Here are nominal home prices (Via Calculated Risk). Not at all-time highs, but not cheap anymore. And I suspect high-end homes (ones that Ballmer would be interested in) are even more expensive relative to where they were after the financial crisis/housing crash in 2010-2011.
4) Commodities suck!
QE’s and unconventional monetary policies all around the world have failed to cause any significant and lasting spike in prices. In fact, deflation risk might be higher. Besides, commodities have rarely been good investments. Gold has sucked for the past 3 years and might be in a 10-year bear market as real rates slowly rise and demand falls.
5) Other Investments (Art, Wine)
Art is what I call “stupid-expensive“. I’m not an art-analyst so I have no idea what a Van Gogh painting might be worth. But the only way that brings any return to you is if some sucker bidder buys it higher. So unless you’re willing to pay insane prices for a pretty illiquid investment in a small market, no way do you touch art. As for wine (which is looking like gold’s rise and fall) and other alternative investments (like Stamps), similar concerns apply. Market’s are pricey, illiquid and/or not large enough.
6) Startups are pricey too!
There’s lots of “startups” or young companies these days. However, they are not cheap. Uber’s going for a massive valuation. And there are hundreds of startups that will likely fail. So to invest in a startup today is to pay a pricey number or to take a major risk.
Now, I am generalizing. I’m sure there is some country that is worth investing in (For example, emerging markets, as measured by $EEM, have gone nowhere over the last few years). I’m sure there’s some fixed-income instrument that offers a reasonable yield. And I’m sure there’s a painting that will go for 30% more in a couple of years. But what I’m trying to get at is that it’s not easy to invest money these days as there is no “obvious” investment unlike the past few years (not that investing in anything is ever “obvious”, but at the moment, its “less obvious”). So why not go for something that is not available everyday, and go with a sports franchise in a sport that’s growing worldwide?
So congrats on your investment Mr. Ballmer, it was probably the correct one. However, do know one thing. The Lakers still run LA (and most of the US).
The Bear case. From Charles
If Steve Ballmer were still running Microsoft (MSFT) I would dump the stock, questioning his judgment and sanity.
Ballmer just agreed to pay a record $2 billion to the Sterling family for the LA Clippers franchise–a franchise that Forbes estimated to be worth $575 million just this past January.
Let’s take a look at the numbers here. The Clippers brought in about $128 million in revenues last season and generated $15 million in operating income. Calculating a “price/earnings” ratio on the purchase would give you a bubbly 133.
Remember, the Clippers are LA’s “other team.” And the Lakers–LA’s premier basketball team and one of the most storied franchises of any sport anywhere in the world–were estimated by Forbes to be worth “only” $1.4 billion. The New York Knicks were estimated to be worth about $50 million more than the Lakers.
I’ve been watching the sports bubble for a while now. As far back as 2010, I questioned whether the boom in sports stadium building were coming to an end. As I noted then, between 1992 and 2010, well over two thirds of ALL major North American sports venues were replaced: 67% of baseball teams, 69% of football teams, 77% of basketball teams, and a shocking 83.3% of hockey teams got new homes or had their old ones substantially renovated to the point of being virtually new. And the prices paid reached the levels of the absurd.
Someone has to pay for all of this, and much of it has been “financed” by lucrative TV deals. But this model seems to be reaching its limits. As I wrote recently, the cost of monthly cable bills have been increasing at a rate of about 6% annually. The average cable bill was $86 in 2011. By 2015, it is forecast to be $123 per month. Given that income growth has been stagnant for years, that’s not a sustainable trend. Ironically, Disney’s ESPN is the number-one culprit; the ESPN channels are alone responsible for about $5.50 per month.
The problem with calling the top of a bubble is that, because they are irrational to begin with, they can always get more irrational. But I’m taking the view that Ballmer’s $2 billion purchase of the Clippers will go down in history as one of the dumbest financial moves in history.
Is there a trade to be made here? If you think the bubble has longer to inflate, consider shares of Madison Square Garden (MSG), the owner of the New York Knicks and the New York Rangers hockey team. If the Clippers are “worth” $2 billion, then the Knicks are “worth” double or triple that amount. And MSG, trading at a P/E of 31, looks “cheap” relative to that of the Clippers.
Just be smart enough to know that you’re trading a bubble.
aQuantive. In August 2007, Microsoft acquired aQuantive, a online ad agency, for $6.3 billion cash, and 85% premium. At the time, it was Microsoft’s largest deal. “This deal takes our advertising business to a new level,” the company’s COO, Kevin Johnson, said at the time. How’d it work out? Microsoft took a $6.2 billion write-off on the business in 2012. “The acquisition did not accelerate growth to the degree anticipated,” the company said.
Skype. In May 2011, Microsoft acquired Skype for $8.5 billion in an unsolicited bid “even though there were no signs of other serious bidders,” as we wrote at the time. The price tag was three times what the company had gone for just 18 months prior, as the company was scrambling to catch up in the mobile and Internet markets. How’d it work out? Microsoft doesn’t break out Skype revenue, so it’s hard to really know. But the service is popular, and they just unveiled a gee-whiz “Star Trek” like universal translator service.
NokiaNOK1V.HE +2.16%. In September 2013, Microsoft acquired Nokia’s handset business, for $7.2 billion in cash. “It’s a bold step into the future – a win-win for employees, shareholders and consumers,” Mr. Ballmer said at the time. How’d it work out? You could argue, if you like, that it’s too soon to say; the deal closed only in April. But Microsoft controls less than 4% of the U.S. smartphone market. Moreover, whether it’s a win-win for employees, shareholders, and consumers, it was a definite loser for Mr. Ballmer: the Nokia deal was apparently the deal-breaker for him, and the internal fight over it led to his ouster.
Yahoo. Of all the deals Microsoft did do, it’s the one that it didn’t do that may be the most instructive. In February 2008, Microsoft offered $44.6 billion for Yahoo, a 62% premium to the company’s stock, in an attempt to merge two struggling search businesses. It was a huge deal in the high-tech world, and it was a huge, public, messy battle that Microsoft eventually lost in one way, and won in another. Yahoo ultimately rejected the deal, although angry shareholder would later boot founder Jerry Yang over it. Yahoo’s stock, which was in the $30 range when the deal was announced, would soon sink into the single digits, and would languish in the teens range for years after.
Not exactly a sterling record, no pun intended, and we didn’t even mention Microsoft’s stock, which went from $58 when Mr. Ballmer took over in 2000 to $40 and change today.
If the argument is an investment argument then the bear case on the numbers is the most cogent.
I have no idea what Mr Ballmer’s net worth is, but assume that $2B represents a fair proportion of his net worth and you have to ask about how concentrated this position is. Further, liquidity. Selling a basketball [or any sports team] can only happen to a fairly select group of investor[s]. If you need to sell fast…for whatever reason, that might be a problem.