The $252-Million Question

We thought we were numb to the numbers.

If Kevin Brown’s $105-million contract didn’t do it, Mike Hampton’s $121 million did.

Then Alex Rodriguez signed for $252 million and we were shocked anew. What could be said besides, go figure.

Five USC graduate business students took it literally. They spent the better part of a term determining what in the name of Alan Greenspan the Texas Rangers were thinking, giving a 25-year-old shortstop enough money to buy more than a billion beers during quarter night on frat row.

The students examined the key figures--people and numbers--behind the Rangers’ justification for the contract and the deal’s ramifications on major league baseball.

They tried to answer the most vexing question of the nascent millennium: A-Rod--shrewd signing or bonehead blunder?

The conclusions are more intriguing than definitive.

The ownership structure of the Rangers and untapped potential of the North Texas market were key factors in the signing and provide a glimpse into the future of major league franchises.

The consternation the contract caused among small-market teams concerned about the diminishing competitive balance in baseball is merited. Yet teams such as the Dodgers and Angels owned by large public companies are also ill-suited to compete with the privately owned Rangers.

Those who prefer line drives over bottom lines, Stengelese over legalese and 33 inches of ash over discussions of cash can take heart: The students found the value of the investment in Rodriguez will be determined primarily on the diamond.

The increase in attendance and accompanying revenue triggered by A-Rod’s signing should be sustained provided the Rangers win--and continue to win. Lose, and Rodriguez would be just another overpaid player on a disappointing team bleeding red ink.

The Players

Meet Tom Hicks. That’s Hicks, not hick. He’s the Rangers’ owner and writes the checks to Rodriguez. Hicks, 55, looks the part. Tall. Beefy. Gentrified cowboy threads. Listed on a low rung of the Fortune 500. His leveraged-buyout firm owns about 200 companies.

Scott Boras needs no introduction. The agent who has the Dodgers in a headlock counts Rodriguez among his 57 major league clients. The prevailing opinion is that Boras fleeced Hicks.

Then there is Rodriguez. What a ballplayer.

After five full seasons with the Seattle Mariners, he is on pace to break Hank Aaron’s home run and runs batted in records before he turns 40. He has driven in more than 110 runs four times, hit more than 40 home runs for three consecutive seasons, and has a career batting average of .309.

He made only 10 errors in 693 chances last year, he runs well, and, until experiencing backlash from the lucrative contract, enjoyed a reputation as an easygoing, hard-working, all-around good guy. Rodriguez is off to a modest start, batting .258 with no home runs through eight games.

“It’s early and I’m sure he’ll come around,” said Jay Buhner, Rodriguez’s former teammate in Seattle. “But I’m also sure that the scrutiny is enormous, particularly when people look at the [salary] numbers and say, ‘Is he really worth twice the next-best guy?’ ”

Any discussion of Rodriguez these days starts with a dollar sign. And that’s where the students began.

The Contract

Rodriguez will earn $252 million in 10 years, a 494% increase over his salary with the Mariners.

His base pay increases progressively from $16 million this year to $23 million each of the last four years of the deal. He gets an additional $3 million to $5 million a year deferred with 3% interest to be paid from 2011 to 2020 and a $10-million bonus spread over the first five years.

Escalator clauses safeguard him from contracting Gary Sheffield disease, ensuring he will be the highest-paid player in baseball. From 2008-2010, the Rangers must pay Rodriguez $1 million more than the next-highest-paid player or he can choose to become a free agent.

Insurance protects the Rangers to a degree if Rodriguez pulls an Albert Belle and retires prematurely because of injury. The students estimate that premiums of about $4 million will be paid annually to cover 38% of the contract, a much lower percentage than the industry standard because of the enormousness of the deal.

Total cost of the contract to the Rangers through 2020: $286.6 million.

Inflation-adjusted value to A-Rod: anywhere from $212.803 million with a 3% inflation rate to $175.648 million with a 6% inflation rate.

Here we go, feeling numb again.

Rodriguez will be paid more than the estimated value of 18 major league teams. He’ll be paid more than the $250 million Hicks spent in 1998 to buy the Rangers from a group headed by George W. Bush. He’ll be paid more than the gross domestic product of seven countries.

To play baseball.

The Justification

Hicks saw Boras coming. Rodriguez’s agent has forged a reputation as a player’s best friend and an owner’s greatest adversary.

He encourages draft picks fresh out of high school to hold out for millions. He extracts unprecedented dollars for established major leaguers--the contracts of clients Greg Maddux, Brown and Bernie Williams set short-lived records.

He insists he is merely getting players their fair share. He points out that attendance is at an all-time high. So are franchise values. So are TV contracts. Yet the percentage of revenues going to player salaries has dipped slightly since 1995.

Boras is a master negotiator. He gets owners talking to walls, bidding against themselves and justifying expenditures with what the previous Ranger owner, the one occupying the White House, calls “fuzzy math.”

Hicks feels like nobody’s fool. He says he sleeps soundly. He has made plenty of investments riskier and more expensive than A-Rod. And that’s what Rodriguez is--an investment--one the MBA students believe could be astute.

“This may turn out to be a sound business decision,” student Eric Tracy said. “[Rodriguez] will bring additional revenues to a market that has enormous potential.”

That’s the way Boras sees it.

“To suggest that I took advantage of a man with Hicks’ business acumen is wholly ridiculous,” he said.

Hicks knows a few things too.

He knows the North Dallas market is as untapped as oil fields on the Texas plains were half a century ago.

He knows Rodriguez is no less an entertainer than Celine Dion, Jim Carrey or David Copperfield, all of whom in 2000 earned more than twice what the shortstop will make in 2001.

Hicks envisions a chain reaction. A-Rod the entertainer creates the buzz. Attendance and revenues skyrocket at The Ballpark in Arlington. The cost of naming rights to the Ballpark skyrockets. The value of the 270 acres owned by Hicks surrounding the Ballpark skyrockets. The franchise value skyrockets.

Hicks’ holdings beyond the Rangers also figure to benefit. The team is part of the Southwest Sports Group Inc., a privately held conglomerate owned by Hicks that also includes the Dallas Stars hockey team, Mesquite Championship Rodeo, a Dallas television station and Southwest Sports Productions.

The “privately held” description is crucial. Hicks was not lynched by stockholders for giving Rodriguez $252 million because there are no stockholders. He can shuffle money and resources from one entity to another and only his accountant knows for sure.

From the students’ analysis: “Hicks’ ownership of Southwest Sports is unique in the sports community. This structure allows him to take advantage of synergies that exist between the various entities to increase sales and reduce marketing and operational costs.”

In other words, Hicks’ TV station plugs Rodriguez the way Fox plugs “Ally McBeal.” And the Stars contacted their ticket-holders and sponsors, mentioned A-Rod and sold several hundred thousand dollars’ worth of Ranger tickets.

Hicks’ holdings help each other the way a rodeo clown assists a fallen cowboy. Yee-ha!

This explains several head-scratchers, such as:

* Why George Steinbrenner turned greener than a vault full of frog skins when he peered into Hicks’ yard. The New York Yankee owner promptly went out and copied his neighbor’s landscape arrangement.

From the students’ analysis: “To better prepare the company for its next cable deal and to capitalize on the largest media market in the country, Steinbrenner formed YankeeNets, a merger of teams that includes the Yankees, New Jersey Nets and the newly acquired New Jersey Devils of the NHL.

“The formation of YankeeNets allows Steinbrenner to augment his already astounding broadcast rights, valued at close to $2.4 billion.”

* Why Disney and the Angels made no serious play for A-Rod.

Because stockholders would have squealed. Because Fox beat Disney to building a regional sports network in Southern California that could promote the player. Because Disney’s sports holdings are such a small part of the company that an A-Rod-sized risk is unnecessary.

* Why Fox and the Dodgers made no serious play for A-Rod.

Same stockholder problem. No other local sports holdings to do the rodeo clown-cowboy thing. And although Fox has plenty of media holdings, they are too far-flung to capitalize on one player in one market.

In fact, Fox indirectly will pay some of A-Rod’s salary because Fox Southwest signed a $500-million contract about a year ago to televise Ranger and Star games.

Hicks taketh from Fox and giveth to Rodriguez. There’s not a lot left to justify.

The Shortstop

Hicks refers to Rodriguez as an investment. The students studied his value as a commodity.

A-Rod knows what Bob Seger meant when he sang, “Feel Like a Number.” Nearly every first reference to Rodriguez in recent game reports has included the $252-million figure.

The contract changed the way he is viewed. What was innocuous is now calculated. What was playful is now arrogant.

His comment to Dan Patrick on ESPN radio that “the 252 is going to be hard to break because of my age and my talent at such a young age” was met with outrage. Never mind that it’s the truth.

The backlash has made Rodriguez guarded. He is a villain for the first time and doesn’t know how to respond. So A-Rod has become arid. Every quote is extra dry.

“I know people want to judge over the next six months,” he said. “That’s fine. I’m going to be [with the Rangers] from seven to 10 years. The whole thing comes down to how you perform. I expect to do what I’ve done in my career.”

If so, he will join Michael Jordan and Tiger Woods as a living, breathing conglomerate. A-Rod as U.S. Steel.

If not, his fall will be a testament to human frailty, the weight of a contract changing a boy playing a game into a man conducting business.

The Competition

Rodriguez’s contract underscores the gulf between the haves and have-nots, the large-market teams that can afford to pay high salaries and the small-market clubs that cannot.

Overall, the students found players are not overpaid. Salaries have held steady between 52% and 54% of team revenues from 1996 to 1999.

But the disparity between teams is a problem in a game in which the score is tallied every nine innings. Even teams owned by huge companies, such as the Dodgers, Angels and Atlanta Braves, are not on the top rung.

“The ownership structures employed by the Southwest Sports Group and YankeeNets represent the short-term future model of professional sports organizations,” Tracy said.

So baseball needs 28 Tom Hicks and George Steinbrenner clones. Ugh.

No wonder Bill Stoneman, general manager of the Angels, said, “The health of the game is changing, and not in a positive direction.”

No wonder Sandy Alderson, major league baseball’s vice president of baseball operations, called the signing a “crisis situation.”

“This contract will affect every team’s ability to operate in this system,” he said. “This is about competition and whether the fans believe they are going to receive a competitive event for the dollar they are paying.”

For the Rangers to win, however, Hicks must continue to write checks. Catcher Ivan Rodriguez--no relation to Alex--and first baseman Rafael Palmeiro will demand large deals and use the Rodriguez contract as leverage.

The students found that signing a superstar has little or no effect on a team’s record, exceptions being the Boston Red Sox in 1998 after signing Pedro Martinez and the New York Mets after signing Mike Piazza in 1999.

And although Hicks has assembled a Gucci lineup, his pitching staff is strictly Pic ‘N Save. To gauge the price of pitching, see recent contracts for Hampton, Brown, Darren Dreifort, Denny Neagle, et al.

The Conclusion

Shrewd signing or bonehead blunder? The students pose two scenarios.

The first is like the man early to bed and early to rise: Baseball is healthy, Rodriguez is wealthy, Hicks is wise.

Assuming the Rangers increase attendance from 2.8 million to 3 million and maintain it through 2010, the investment in Rodriguez will yield an inflation-adjusted return of $17.1 million.

The second scenario identifies a fool: Hicks and his money are soon parted.

Assuming the Rangers increase attendance only in 2001 and that the impact of Rodriguez on revenue comes only from stadium naming rights, the investment will result in a loss of $56.1 million.

“The main thing I learned is that for the deal to be worthwhile to Hicks, Rodriguez must make the Rangers better over the long term,” student Mike Munroe said. “Winning will sustain the attendance increase and result in a lot of stadium revenue.”

The only certainties are that A-Rod will make about $155,000 tonight against the Angels and the students will be a few units closer to an MBA and serious scratch of their own.

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The Deal

$252 million over 10 years. His base pay increases progressively from $16 million this year to $23 million each of the last four years of the deal. He gets an additional $3 million to $5 million a year deferred with 3% interest to be paid from 2011 to 2020 and a $10-million bonus spread over the first five years.

The Deal Makers

* Tom Hicks, Ranger owner. Cracks the Fortune 500, his leveraged-buyout firm owns about 200 companies.

* Agent Scott Boras, who has 57 major league clients and who previously negotiated a record-setting contract for Kevin Brown ($105 million) among others.

* Rodriguez, the 25-year-old shortstop who after five full seasons in Seattle is on pace to break Hank Aaron’s home run and runs batted in records before he turns 40.

The Upside

Hicks, as the private owner of the Rangers, is banking on Rodriguez creating a stir on the field and at the gate, fueling increases in:

* attendance;

* naming rights;

* the value of the land surrounding The Ballpark in Arlington;

* the franchise value.

The Downside

The study concludes that if Rodriguez fuels only a one-season spike in attendance, Hicks could lose a good chunk of money on the biggest contract in American sports history.