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Practical Applications of

Corporate Finance

Presentation to Finance 321

University of Illinois at Urbana-Champaign

March 27, 2007
Today’s Discussion

Case study: A-Rod – Signing the
Best Player in Baseball

My career in finance: a perspective
Today’s Discussion

Case study: A-Rod – Signing the
Best Player in Baseball

My career in finance: a perspective
Assessing Value
Key issue
Is this 25-year-old baseball player worth
one quarter of a billion dollars?
Key considerations
What are the incremental benefits that
will accrue to the Rangers over the life of
the contract – and beyond?
What characteristics does this asset
possess that make it attractive?
– Uniqueness/rarity
– Complementarity
Key themes – Appropriability
– Life-cycle value creation
What can be done during the
ownership/disposal phases to enhance
the value of this asset?
What are the key risks in buying this
asset – and how can they be mitigated?
Record Offensive Statistics
At
bats 12,36 9,507 11,43 8,001 8,298 10,96 10,88 8,399 2,930
100% 4 4 1 1
=

Strike
outs/walk
s

Base hits
Home runs
Hank Ty Cobb Ken Willie Alex
Aaron Barry Lou Griffey Ricky Mays BabeRodriguez
Batting Bonds Gehrig Henders Ruth
High .355 .370 .420 .374 .327 on
.327 .347 .393 .358
Average .305 .299 .366 .340 .291 .279 .302 .342 .314
RBI
High 132 129 127 184 146 74 141 163 132
Average 100 92 81 117 89 45 87 101 115
Stolen bases
High 31 52 96 17 24 130 40 17 46
Average 10 24 37 6 10 56 15 6 25
Career 23 21 24 17 18 25 22 22 5
(years)
Source: Baseball Almanac
On-Base and Slugging Statistics

On-base percentage Slugging average
Average High Average High
Ted Williams .482 .553 Babe Ruth .690 .847
Babe Ruth .474 .545 Ted Williams .634 .901
Lou Gehrig .447 .538 Lou Gehrig .632 .769
Barry Bonds .443 .609 Barry Bonds .608 .863
Ty Cobb .433 .468 Alex Rodriguez .576 .631
Ricky Henderson .401 .469 Ken Griffey .557 .674
Willie Mays .384 .425 Willie Mays .557 .667
Alex Rodriguez .380 .420 Hank Aaron .555 .669
Hank Aaron .374 .410 Ty Cobb .512 .621
Ken Griffey .374 .408 Ricky Henderson .419 .577
Analytical Framework
Tickets
Ticket revenue x Average price
$18.00
+ + Spaces/
Live gate Parking/concessions purchases
Incremental revenue revenue x Average price
revenue $2.50
+ +
+ Items
x Merchandise revenue x Average price
Sponsorships $1.80
Franchise $1 million
Value multiple +
3.0x Broadcast
revenue
+ + Incremental revenue
$10 million • Regression
“Glamour
ALCS revenue x Probability analysis:
factor” 7.0% 45,000
$100 million + additional
Incremental revenue attendees per
World Series $10 million win
revenue x Probability • Eight (8)
+ 3.5% additional
Revenue lost to wins
revenue sharing
17.5%
* Additional assumptions: discount ate = 8.0%, inflation rate = 3.5%, baseline salary inflation rate
= 16.5%, interest rate on deferred money = 3%, tax rate = 40%, contract insurance = 10.0%
DCF Analysis of Rodriguez Signing
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Incremental benefits

Incremental attendance 360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000
ALCS incremental revenue 700,000 724,500 749,858 776,103 803,266 831,380 860,479 890,595 921,766 954,028
World Series incremental
revenue 350,000 362,250 374,929 388,051 401,633 415,690 430,239 445,298 460,883 477,014
Ticket sales 6,480,000 6,706,800 6,941,538 7,184,492 7,435,949 7,696,207 7,965,575 8,244,370 8,532,923 8,831,575
Parking/concessions 900,000 931,500 964,103 997,846 1,032,771 1,068,918 1,106,330 1,145,051 1,185,128 1,226,608
Merchandise 648,000 670,680 694,154 718,449 743,595 769,621 796,557 824,437 853,292 883,157
Broadcast revenue 0 0 0 0 0 0 0 0 0 0
Sponsorships 1,000,000 1,035,000 1,071,225 1,108,718 1,147,523 1,187,686 1,229,255 1,272,279 1,316,809 1,362,897
Revenue lost to revenue (1,588,650 (1,644,253 (1,701,802 (1,761,365 (1,823,012 (1,886,818 (1,952,856 (2,021,206 (2,091,949
sharing ) ) ) ) ) ) ) ) ) (2,165,167)
134,710,33
Increase in franchise value 8
146,280,45
Total benefits 8,489,350 8,786,477 9,094,004 9,412,294 9,741,724 10,082,685 10,435,579 10,800,824 11,178,853 1

Incremental expenses

Salary for replacement
shortshop 3,000,000 3,495,000 4,071,675 4,743,501 5,526,179 6,437,999 7,500,268 8,737,813 10,179,552 11,859,178

Salary plus signing bonus 23,000,000 23,000,000 23,000,000 23,000,000 27,000,000 25,000,000 27,000,000 27,000,000 27,000,000 27,000,000
Cash outlay (ex deferred
interest) 18,000,000 19,000,000 20,000,000 20,000,000 23,000,000 21,000,000 23,000,000 24,000,000 24,000,000 24,000,000
Actual cash outlay to A-Rod 18,000,000 19,000,000 20,000,000 20,000,000 23,000,000 21,000,000 23,000,000 24,000,000 24,000,000 24,000,000
Incremental salary 15,000,000 15,505,000 15,928,325 15,256,499 17,473,821 14,562,001 15,499,732 15,262,187 13,820,448 12,140,822

Variable costs (incremental
revenue) 0 0 0 0 0 0 0 0 0 0
Contract insurance 2,000,000 1,950,500 1,892,833 1,825,650 2,147,382 1,856,200 1,949,973 1,826,219 1,682,045 1,514,082
Taxes -3,404,260 -3,467,609 -3,490,861 -3,067,942 -3,951,791 -2,534,207 -2,805,650 -2,515,033 -1,729,456 53,050,218
Total costs 13,595,740 13,987,891 14,330,296 14,014,207 15,669,412 13,883,995 14,644,054 14,573,373 13,773,037 66,705,123

Net benefits -5,106,390 -5,201,414 -5,236,292 -4,601,913 -5,927,687 -3,801,310 -4,208,476 -3,772,549 -2,594,184 79,575,328
Discount factor 0.93 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50 0.46
Discounted net benefits -4,728,139 -4,459,374 -4,156,738 -3,382,543 -4,034,284 -2,395,470 -2,455,605 -2,038,191 -1,297,738 36,858,774
(1,327,258
Net present value
DCF Analysis of Rodriguez Signing
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Incremental benefits

Incremental attendance
ALCS incremental revenue
World Series incremental
revenue
Ticket sales
Parking/concessions
Merchandise
Broadcast revenue
Sponsorships
Revenue lost to revenue
sharing
Increase in franchise value
Total benefits

Incremental expenses

Salary for replacement
shortshop

Salary plus signing bonus
Cash outlay (ex deferred
interest) 5,000,000 4,000,000 3,000,000 3,000,000 4,000,000 4,000,000 4,000,000 3,000,000 3,000,000 3,000,000
Actual cash outlay to A-Rod 6,719,582 5,375,680 4,031,760 4,031,760 5,375,680 5,375,680 5,375,680 4,031,760 4,031,760 4,031,760
Incremental salary 6,719,582 5,375,680 4,031,760 4,031,760 5,375,680 5,375,680 5,375,680 4,031,760 4,031,760 4,031,760

Variable costs (incremental
revenue) 0 0 0 0 0 0 0 0 0 0
Contract insurance
Taxes -2,687,833 -2,150,272 -1,612,704 -1,612,704 -2,150,272 -2,150,272 -2,150,272 -1,612,704 -1,612,704 -1,612,704
Total costs 4,031,749 3,225,408 2,419,056 2,419,056 3,225,408 3,225,408 3,225,408 2,419,056 2,419,056 2,419,056

Net benefits -4,031,749 -3,225,408 -2,419,056 -2,419,056 -3,225,408 -3,225,408 -3,225,408 -2,419,056 -2,419,056 -2,419,056
Discount factor 0.43 0.40 0.37 0.34 0.32 0.29 0.27 0.25 0.23 0.21
Discounted net benefits -1,729,148 -1,280,854 -889,482 -823,594 -1,016,783 -941,466 -871,728 -605,366 -560,524 -519,004
What Happened Next
Events
December 2000: signs record $252 million, 10-year
contract with Texas Rangers
Tom Hicks, Rangers owner: “Alex is the player we believe
will allow this franchise to fulfill its dream of continuing on
its path to becoming a World Series champion.”
Alex Rodriguez: “Hopefully when it is over, they won’t be
calling Mr. Hicks a fool, but the wisest man in baseball. But
only time will tell.”
For 2003 season, Rodriguez wins American League Most
Valuable Player; the Rangers finish the season with
win/loss ratio of 0.78 – identical to its 2000 finish

February 2004: Rangers trade Rodriguez to New York
Yankees and agree to pay $67 million of the $179 million
remaining on his original contract
Rodriguez wins 2005 American League MVP award
September 2006: Sports Illustrated publishes cover story
entitled, “The Lonely Yankee,” which highlights
Rodriguez’s failure to win acceptance with the media,
Yankee fans, and his own teammates
Unidentified Yankee teammate: “It was always about the
numbers in Seattle and Texas for him. Winning is all you’re
judged on here.”
A-Rod Offensive Statistics
Batting Home Stolen
average RBI runs bases Milestones/awards

Mariners lose ALCS
2000
to Yankees

2001 Signs with Texas
Rangers

2002 AL Gold Glove –
shortstop

2003 AL Gold Glove –
shortstop; AL MVP
Signs with New York
2004
Yankees

2005 AL Silver Slugger;
AL MVP

2006

Source: Baseball Almanac
Team Standings by Year

Mariners Rangers Yankees
W/L W/L W/L
Year Wins Losses ratio Wins Losses ratio Wins Losses ratio
1995 79 66 1.20 74 70 1.06 79 65 1.22
1996 85 76 1.12 90 72 1.25 92 70 1.31
1997 90 72 1.25 77 85 0.91 96 66 1.45
1998 76 85 0.89 88 74 1.19 114 48 2.38
1999 79 83 0.95 95 67 1.42 98 64 1.53
2000 91 71 1.28 71 91 0.78 87 74 1.18
2001 116 46 2.52 73 89 0.82 95 65 1.46
2002 93 69 1.35 72 90 0.80 103 58 1.78
2003 93 69 1.35 71 91 0.78 101 61 1.66
2004 63 99 0.64 89 73 1.22 101 61 1.66
2005 69 93 0.74 79 83 0.95 95 67 1.42
2006 78 84 0.93 80 82 0.98 97 65 1.49
Attendance and Wins by Team
Mariners Mariners
Rangers Rangers Attendance
Wins Yankees Yankees Indexed

Source: ESPN, Baseball Almanac
Key Takeaways

Financial concepts are applicable to a wide
range of situations – not just to standard
corporate financial decision making

Finance is a fundamental tool in problem
solving: it forces logic and ensures analytical
rigor and completeness

Classic financial skills can be brought to bear
in assessing, building, and managing personal
value/wealth creation
Today’s Discussion

Case study: A-Rod – Signing the Best
Player in Baseball

My career in finance: a perspective
My Story
My resume My story

Experiences Aimed to create distinctive skill set Comments
Operational A seemingly
Allstate Insurance Financial incremental, logical
Company Deal execution progression; but in
Deutsche Bank Complex business problem solving reality a narrative
Managerial filled with twists,
Bankers Trust turns, and
Supplemented with international
experience ultimately self-
McKinsey & Company U.S. discovery
U.K. Personal renewal/
Goldman Sachs
France reinvention entails
Worked hard to establish and experimentation,
cultivate broad professional network learning, adapting –
Education and a willingness to
International business
Harvard Business School Finance put oneself at risk
Government Coherence does
Oxford University Philanthropy emerge: our
Middlebury College Established track record/ reputation present is related to
Hard working the past, and from
Tulane University Energetic that trajectory, we
Focused initially on establishing are able to glimpse
credibility through academics our future
Selected Career Experiences
Firm Selected projects
Goldman Sachs • Conducted initial public offering of Tiffany &
Company
• Completed trading floor rotation in Debt Capital
markets
• Brought secondary common stock offering to
market for Chili’s, Inc.
McKinsey & • Launched first-ever electricity trading business
Company for Enron Corp.
• Assessed worldwide power plant development
opportunities for EDF, France’s state-owned
electric utility
Bankers Trust/ • Served as Chief of Staff for Chairman and CEO
Deutsche Bank • Member of senior team that accomplished sale
of Bankers Trust to Deutsche Bank
• Worked as London-based mergers and
acquisitions specialist
Allstate • Led teams responsible for pricing, product, and
Insurance underwriting decisions for Eastern half of the
Company U.s.
Overview of Professional Development
Future leadership role
Leadership potential
Business/general management
Technical/functional expertise
People leadership

Performance
Demonstrated impact
Performance impact
Intellectual contributions/thought leadership
People development/followership

Prerequisites
Basic skills Personal impact Adherence to professional values
Business/technical problem solving Partnerlike behavior Reinforces professional values
Conceptual power Development/caring for Does what is right
Business judgment people
Productivity/quality control Inspirational to others
People leadership Is enjoyable to work with
Interpersonal relations
Communications effectiveness
A Few Parting Words


We have not even to risk the adventure alone, for
the heroes of all time have gone before us. The
labyrinth is thoroughly known. We have only to
follow the thread of the hero path. And where we
had thought to find an abomination, we shall find a
god. And where we had thought to slay another,
we shall slay ourselves. And where we had
thought to travel outward, we shall come to the


center of our own existence. And where we had
thought to be alone, we shall be with all the world.

Joseph Campbell

Key themes
Heroism: follow the examples of recognized heroes
Career is, ultimately, a journey/quest of self-knowledge
and understanding
Intense sense of commonality/kinship