Last Friday, Shelly Sterling announced that she was selling the Los Angeles Clippers to Steve Ballmer for $2 billion. The deal was immediately challenged by Donald Sterling who sued the NBA for $1B in damages. However, after backing down from his lawsuit last night, the deal has a green-light to proceed. For a team most recently valued by Forbes at $575M, the transaction seems insane. Especially since the Sacramento Kings sold for $475M last year and the Milwaukee Bucks sold for $550M earlier this year.
As ESPN sports business reporter Darren Rovell commented on Friday, “I believe, based on the Bucks sale, the Clippers would have got about $900M.” So what happened? Why did the Clippers sell for so much money?
The real story is a perfect storm of influences that drove up the valuation of a team with no stadium, low television revenues and a terrible brand. If nothing else, it’s a model for how to run a deal.
Ego and Need
Like every deal that exceeds expected valuation, there has to be a reason beyond the money that drove up price.
In this case, the underlying factor was that Steve Ballmer isn’t really investing (financially) in the Clippers. He has a well-known affinity for basketball, even playing hoops at a court near the Microsoft offices for years. Last year, he tried to buy the Sacramento Kings but lost out to another Silicon Valley titan, Vivek Ranadive. His ticket to the 30-owner party that is the NBA keeps getting snatched away.
Like any company who recently lost out on a good deal in their space, Ballmer didn’t want to lose again. And that’s probably why he raised his all-cash offer from $1.8B to $2B so quickly after Shelly Sterling asked for final bids on Thursday.
A similar situation happened a few years ago between Twitter and Facebook. Twitter initially went after Instagram, offering $300M in a stock and cash bid for the company without revenue. A few days later, the founder of Instagram met with Mark Zuckerberg who offered him $1B while they were chatting in his living room. Facebook believes pictures are the core of their service and Zuckerberg was unwilling to see Instagram go to his competitor, so he pushed up the bid massively on the spot. He had to have the pictures.
Beyond Ballmer’s ego, he understands that there aren’t a whole lot of teams that will be up for sale in the near future. In the last 4 years, 12 of the 30 NBA teams have been sold. With teams typically staying in their owner’s hands for 15-20 years, there aren’t a lot that will be for sale in the short run. In other words, deal flow is weak and unlikely to get better in the near term. Plus, with a $20B net worth, he has plenty of dry powder to put to work.
“It’s no wonder the prices are so high,” Ed Desser, a former president of NBA Television and New Media Ventures, told The Guardian newspaper. “There just aren’t enough sports teams for all the billionaires who want them.”
Being in the second largest market in the country makes this a potentially unique acquisition. Of the 12 teams sold in the last 4 years, only 2 of them were in massive markets: the LA Clippers and the NJ Nets (now Brooklyn Nets). The other major markets or storied franchises, like the LA Lakers, Boston Celtics, New York Knicks or Chicago Bulls are held by owners who are still actively involved and unlikely to sell any time soon. Sometimes having a great deal in a strategic part of the market can help drive the price of a deal.
Massive Press and a Tight Auction
As any banker will tell you, the trick to maximizing transaction value is getting all of your interested buyers to the table at the same time. When parties start taking their time, stretching the deal out, only bad things can happen. As bankers often say, “time kills deals.”
The Donald Sterling tapes created a firestorm of controversy which created interest in the team far beyond the players on the court. Sometimes controversy or massive press can create interest from groups that wouldn’t have even thought to purchase your business in the first place. Especially if your company is suddenly tied to something larger than financial concerns. If you can’t connect yourself to anything larger, sometimes leaking news of your deal talks can lead to new bids and higher prices.
When the NBA acted swiftly to oust the Sterling family, an auction timeline was set with a very real deadline. While most deadlines are arbitrary and can sometimes be prone to manipulation, this deadline was fixed. If the deal didn’t go through, the Sterlings would lose control of their ability to sell the team themselves. So Shelly Sterling moved fast — getting offers on Wednesday and signing the $2B counter offer with Steve Ballmer on Thursday night.
While there are rumors that other groups may have been willing to pay as much as $2.5B for the team, the risk of waiting was too high. Ballmer was willing to pay cash and quickly. The other groups were still putting together their financing options. Using the impending deadline strategy helped Shelly Sterling avoid a failed transaction and a potentially lower price in an NBA-led sale.
In many deals it actually makes sense to do what Shelly did and take the cash on the table rather than waiting for the perfect bid. The bid may never show up or might fall through and you can easily end up with a busted auction. If you have to go back to the groups who previously bid, you’ll almost never get anywhere near as much money from them as they offered the first time.
Though not every company is going to be a highly coveted asset with multiple bidders competing against each other, the lessons hold. If you can find the companies that need your services immensely, missed out on other hot deals recently, and can get multiple bidders to the table at the same time, then you too can get a much higher price than you expected.