practical applications of corporate finance presentation to finance 321 university of illinois at...
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Practical Applications ofPractical Applications ofCorporate FinanceCorporate Finance
Presentation to Finance 321Presentation to Finance 321
University of Illinois at Urbana-ChampaignUniversity of Illinois at Urbana-Champaign
March 27, 2007March 27, 2007
Today’s DiscussionToday’s Discussion
Case study: Case study: A-Rod – Signing the A-Rod – Signing the Best Player in BaseballBest Player in Baseball
My career in finance: a perspectiveMy career in finance: a perspective
Today’s DiscussionToday’s Discussion
Case study: Case study: A-Rod – Signing the A-Rod – Signing the Best Player in BaseballBest Player in Baseball
My career in finance: a perspectiveMy career in finance: a perspective
Assessing ValueAssessing Value
Is this 25-year-old baseball player worth Is this 25-year-old baseball player worth one quarter of a billion dollars?one quarter of a billion dollars?
Key themesKey themes
Key issueKey issue
What are the incremental benefits that What are the incremental benefits that will accrue to the Rangers over the life of will accrue to the Rangers over the life of the contract – and beyond?the contract – and beyond?What characteristics does this asset What characteristics does this asset possess that make it attractive?possess that make it attractive?– Uniqueness/rarityUniqueness/rarity– ComplementarityComplementarity– AppropriabilityAppropriability– Life-cycle value creationLife-cycle value creation
What can be done during the What can be done during the ownership/disposal phases to enhance ownership/disposal phases to enhance the value of this asset?the value of this asset?What are the key risks in buying this What are the key risks in buying this asset – and how can they be mitigated?asset – and how can they be mitigated?
Key considerationsKey considerations
6.1 7.7 6.2 6.8 6.1 8.5 6.9
24.4 22.2 35.6 27.8 22.3 25.2 24.1 25.7 25.1
69.5 70.1 63.4 66.0 70.9 72.1 69.8 68.0
2.71.0
65.8
Home runsHome runsBase hitsBase hits
Strike Strike outs/walkouts/walk
ss
At At bats bats
100% 100% ==
Source: Baseball Almanac
Hank Hank AaronAaron
12,3612,3644
Barry Barry BondsBonds
9,5079,507
Ty CobbTy Cobb
11,4311,4344
Lou Lou GehrigGehrig
8,0018,001
Ken Ken GriffeyGriffey
8,2988,298
Ricky Ricky HendersHenders
onon
10,9610,9611
Willie Willie MaysMays
10,8810,8811
Babe Babe RuthRuth
8,3998,399
Alex Alex RodriguezRodriguez
2,9302,930
Record Offensive StatisticsRecord Offensive Statistics
AverageAverageHighHigh
AverageAverageHighHigh
AverageAverageHighHigh
.355.355 .370.370 .420.420 .374.374 .327.327 .327.327 .347.347 .393.393 .358.358
.305.305 .299.299 .366.366 .340.340 .291.291 .279.279 .302.302 .342.342 .314.314
132132 129129 127127 184184 146146 7474 141141 163163 132132100100 9292 8181 117117 8989 4545 8787 101101 115115
3131 5252 9696 1717 2424 130130 4040 1717 46461010 2424 3737 66 1010 5656 1515 66 2525
BattingBatting
RBIRBI
Stolen basesStolen bases
2323 2121 2424 1717 1818 2525 2222 2222 55Career Career (years)(years)
On-Base and Slugging StatisticsOn-Base and Slugging Statistics
On-base percentage Slugging averageAverage High Average High
Ted Williams .482 .553 Babe Ruth .690 .847Babe Ruth .474 .545 Ted Williams .634 .901Lou Gehrig .447 .538 Lou Gehrig .632 .769Barry Bonds .443 .609 Barry Bonds .608 .863Ty Cobb .433 .468 Alex Rodriguez .576 .631Ricky Henderson .401 .469 Ken Griffey .557 .674Willie Mays .384 .425 Willie Mays .557 .667Alex Rodriguez .380 .420 Hank Aaron .555 .669Hank Aaron .374 .410 Ty Cobb .512 .621Ken Griffey .374 .408 Ricky Henderson .419 .577
Analytical FrameworkAnalytical Framework
Spaces/ purchases
Average price$18.00
Tickets
Average price$2.50
Average price$1.80
Items
Parking/concessions revenue
Incremental revenue $10 million
Merchandise revenue
Ticket revenue
Probability7.0%
Probability3.5%
Incremental revenue$10 million
Incremental revenue
Franchise multiple
3.0x
“Glamour factor”
$100 million
Value
x
+
+
Live gate revenue
Sponsorships $1 million
World Series revenue
Broadcast revenue
ALCS revenue
Revenue lost to revenue sharing
17.5%
+
+
+
+x
x
+
+
x
+
x
+
x
*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%
• Regression analysis:
45,000 additional
attendees per win
• Eight (8) additional
wins
DCF Analysis of Rodriguez SigningDCF Analysis of Rodriguez Signing2001 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 sharing
(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) (2,165,167)
Increase in franchise value134,710,33
8
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 11,178,853 146,280,45
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 0.46Discounted 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
Net present value(1,327,258
)
DCF Analysis of Rodriguez SigningDCF Analysis of Rodriguez Signing2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Incremental benefits
Incremental attendanceALCS incremental revenueWorld Series incremental revenueTicket salesParking/concessionsMerchandiseBroadcast revenueSponsorshipsRevenue lost to revenue sharingIncrease in franchise value Total benefits
Incremental expenses
Salary for replacement shortshop
Salary plus signing bonusCash 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 insuranceTaxes -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 -2,419,056Discount factor 0.43 0.40 0.37 0.34 0.32 0.29 0.27 0.25 0.23 0.21Discounted 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 NextWhat Happened Next
December 2000: signs record $252 million, 10-year December 2000: signs record $252 million, 10-year contract with Texas Rangerscontract with Texas RangersTom Hicks, Rangers owner: “Alex is the player we believe Tom Hicks, Rangers owner: “Alex is the player we believe will allow this franchise to fulfill its dream of continuing on will allow this franchise to fulfill its dream of continuing on its path to becoming a World Series champion.”its path to becoming a World Series champion.”Alex Rodriguez: “Hopefully when it is over, they won’t be Alex Rodriguez: “Hopefully when it is over, they won’t be calling Mr. Hicks a fool, but the wisest man in baseball. But calling Mr. Hicks a fool, but the wisest man in baseball. But only time will tell.”only time will tell.”For 2003 season, Rodriguez wins American League Most For 2003 season, Rodriguez wins American League Most Valuable Player; the Rangers finish the season with Valuable Player; the Rangers finish the season with win/loss ratio of 0.78 – identical to its 2000 finishwin/loss ratio of 0.78 – identical to its 2000 finish
EventsEvents
February 2004: Rangers trade Rodriguez to New York February 2004: Rangers trade Rodriguez to New York Yankees and agree to pay $67 million of the $179 million Yankees and agree to pay $67 million of the $179 million remaining on his original contractremaining on his original contractRodriguez wins 2005 American League MVP awardRodriguez wins 2005 American League MVP awardSeptember 2006: September 2006: Sports IllustratedSports Illustrated publishes cover story publishes cover story entitled, “The Lonely Yankee,” which highlights entitled, “The Lonely Yankee,” which highlights Rodriguez’s failure to win acceptance with the media, Rodriguez’s failure to win acceptance with the media, Yankee fans, and his own teammatesYankee fans, and his own teammatesUnidentified Yankee teammate: “It was always about the Unidentified Yankee teammate: “It was always about the numbers in Seattle and Texas for him. Winning is all you’re numbers in Seattle and Texas for him. Winning is all you’re judged on here.”judged on here.”
.316
.318
.300
.298
.286
.321
.290
Batting Batting averageaverage
Source:Baseball Almanac
20002000
20012001
20022002
20032003
20042004
20052005
20062006
132
135
142
118
106
130
121
RBIRBI
41
52
57
47
36
48
35
Home Home runsruns
15
18
9
17
28
21
15
Stolen Stolen basesbases Milestones/awardsMilestones/awards
Mariners lose ALCS Mariners lose ALCS to Yankeesto Yankees
A-Rod Offensive StatisticsA-Rod Offensive Statistics
Signs with Texas Signs with Texas RangersRangers
AL Gold Glove – AL Gold Glove – shortstopshortstop
AL Gold Glove – AL Gold Glove – shortstop; AL MVPshortstop; AL MVP
AL Silver Slugger;AL Silver Slugger;AL MVPAL MVP
Signs with New York Signs with New York YankeesYankees
Team Standings by YearTeam Standings by Year
Mariners Rangers Yankees
Year Wins LossesW/L ratio Wins Losses
W/L ratio Wins Losses
W/L 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
0
20
40
60
80
100
120
140
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
0
20
40
60
80
100
120
140
160
180
200
Attendance and Wins by TeamAttendance and Wins by Team
WinsWinsAttendance Attendance
IndexedIndexed
Source:ESPN, Baseball Almanac
MarinersMarinersRangersRangersYankeesYankees
MarinersMarinersRangersRangersYankeesYankees
Key TakeawaysKey Takeaways
Financial concepts are applicable to a wide Financial concepts are applicable to a wide range of situations – not just to standard range of situations – not just to standard corporate financial decision makingcorporate financial decision making
Finance is a fundamental tool in problem Finance is a fundamental tool in problem solving: it forces logic and ensures analytical solving: it forces logic and ensures analytical rigor and completenessrigor and completeness
Classic financial skills can be brought to bear Classic financial skills can be brought to bear in assessing, building, and managing personal in assessing, building, and managing personal value/wealth creationvalue/wealth creation
Today’s DiscussionToday’s Discussion
Case study: Case study: A-Rod – Signing the A-Rod – Signing the Best Player in BaseballBest Player in Baseball
My career in finance: a perspectiveMy career in finance: a perspective
My StoryMy Story
OperationalOperationalFinancialFinancialDeal executionDeal executionComplex business problem solvingComplex business problem solvingManagerialManagerial
Aimed to create distinctive skill setAimed to create distinctive skill set
My storyMy story
U.S.U.S.U.K.U.K.FranceFrance
Supplemented with international Supplemented with international experienceexperience
International businessInternational businessFinanceFinanceGovernmentGovernmentPhilanthropyPhilanthropy
Worked hard to establish and Worked hard to establish and cultivate broad professional networkcultivate broad professional network
Hard workingHard workingEnergeticEnergetic
Established track record/ reputationEstablished track record/ reputation
Focused initially on establishing Focused initially on establishing credibility through academicscredibility through academics
CommentsComments
A seemingly A seemingly incremental, logical incremental, logical progression; but in progression; but in reality a narrative reality a narrative filled with twists, filled with twists, turns, and turns, and ultimately self-ultimately self-discoverydiscovery
Personal renewal/ Personal renewal/ reinvention entails reinvention entails experimentation, experimentation, learning, adapting – learning, adapting – and a willingness to and a willingness to put oneself at riskput oneself at risk
Coherence does Coherence does emerge: our emerge: our present is related to present is related to the past, and from the past, and from that trajectory, we that trajectory, we are able to glimpse are able to glimpse our futureour future
Allstate Insurance Allstate Insurance CompanyCompany
Deutsche BankDeutsche Bank
Bankers TrustBankers Trust
McKinsey & CompanyMcKinsey & Company
Goldman SachsGoldman Sachs
ExperiencesExperiences
My resumeMy resume
Harvard Business SchoolHarvard Business School
Oxford UniversityOxford University
Middlebury CollegeMiddlebury College
Tulane UniversityTulane University
EducationEducation
Selected Career ExperiencesSelected Career Experiences
FirmFirm Selected projectsSelected projects
Goldman SachsGoldman Sachs • Conducted initial public offering of Tiffany & Conducted initial public offering of Tiffany & CompanyCompany
• Completed trading floor rotation in Debt Capital Completed trading floor rotation in Debt Capital marketsmarkets
• Brought secondary common stock offering to Brought secondary common stock offering to market for Chili’s, Inc.market for Chili’s, Inc.
McKinsey & McKinsey & CompanyCompany
• Launched first-ever electricity trading business Launched first-ever electricity trading business for Enron Corp.for Enron Corp.
• Assessed worldwide power plant development Assessed worldwide power plant development opportunities for EDF, France’s state-owned opportunities for EDF, France’s state-owned electric utilityelectric utility
Bankers Trust/ Bankers Trust/ Deutsche BankDeutsche Bank
• Served as Chief of Staff for Chairman and CEOServed as Chief of Staff for Chairman and CEO• Member of senior team that accomplished sale Member of senior team that accomplished sale
of Bankers Trust to Deutsche Bankof Bankers Trust to Deutsche Bank• Worked as London-based mergers and Worked as London-based mergers and
acquisitions specialistacquisitions specialist
Allstate Allstate Insurance Insurance CompanyCompany
• Led teams responsible for pricing, product, and Led teams responsible for pricing, product, and underwriting decisions for Eastern half of the underwriting decisions for Eastern half of the U.s.U.s.
• Involved in numerous strategic evaluations and Involved in numerous strategic evaluations and initiativesinitiatives
Overview of Professional DevelopmentOverview of Professional Development
PrerequisitesPrerequisites
Business/technical problem solvingBusiness/technical problem solvingConceptual powerConceptual powerBusiness judgmentBusiness judgmentProductivity/quality controlProductivity/quality control
People leadershipPeople leadershipInterpersonal relationsInterpersonal relationsCommunications effectivenessCommunications effectiveness
Basic skillsBasic skillsPartnerlike behaviorPartnerlike behaviorDevelopment/caring for Development/caring for peoplepeopleInspirational to othersInspirational to othersIs enjoyable to work withIs enjoyable to work with
Personal impactPersonal impactReinforces professional valuesReinforces professional valuesDoes what is rightDoes what is right
Adherence to professional valuesAdherence to professional values
PerformancePerformance
Performance impactPerformance impactIntellectual contributions/thought leadershipIntellectual contributions/thought leadershipPeople development/followershipPeople development/followership
Demonstrated impactDemonstrated impact
Future leadership roleFuture leadership role
Business/general managementTechnical/functional expertisePeople leadership
Leadership potential
A Few Parting WordsA Few Parting Words
Heroism: follow the examples of recognized heroesHeroism: follow the examples of recognized heroesCareer is, ultimately, a journey/quest of self-knowledge Career is, ultimately, a journey/quest of self-knowledge and understandingand understandingIntense sense of commonality/kinshipIntense sense of commonality/kinship
Key themesKey themes ”“We have not even to risk the adventure alone, for We have not even to risk the adventure alone, for
the heroes of all time have gone before us. The the heroes of all time have gone before us. The labyrinth is thoroughly known. We have only to labyrinth is thoroughly known. We have only to follow the thread of the hero path. And where we follow the thread of the hero path. And where we had thought to find an abomination, we shall find a had thought to find an abomination, we shall find a god. And where we had thought to slay another, god. And where we had thought to slay another, we shall slay ourselves. And where we had we shall slay ourselves. And where we had thought to travel outward, we shall come to the thought to travel outward, we shall come to the center of our own existence. And where we had center of our own existence. And where we had thought to be alone, we shall be with all the world.thought to be alone, we shall be with all the world.
Joseph CampbellJoseph Campbell