How to structure a deal to buy a ball team (or any business)
Recently a group including Derek Jeter and Jeb Bush “won” the rights to make an offer for the Florida Marlins baseball team. Depending upon how the deal is structured will determine how much Derek and Jeb would own. The announcement presents a good opportunity to explain how many business acquisitions work.
When Steve Ballmer bought the L.A. Clippers for $2 billion he simply wrote a check and became the 100% owner. However, most deals are not done that way. They have intricate funding and various levels of ownership. My blog on April 3, 2012 told about the purchase of the L.A. Dodgers so you can reread that for some background information.
For clarity, I used a nice round number of $1 billion, but it is likely the team will sell for a greater amount. Let’s suppose the team will sell for $1 billion and that a group of people will get together to acquire it. A minority investor putting up $10 million would own 1 percent of the team [$10 million / $1 billion]. If financing was obtained for half of the price, then only $500 million of investors’ money, called equity, would be needed. Now that same $10 million would own 2 percent. If $800 million could be borrowed, then the equity would be $200 million and $10 million would buy 5 percent of the team. Simple math: The more that is borrowed, the less the investment; however, the greater the borrowing, the greater the risk since downturns do occur and there is a higher chance for the equity to get wiped out.
There are reasons for some people getting equity without investing their proportionate share and this is variously called sweat equity, managing equity, equity for guaranteeing debt or equity for a marquee person to be involved. Options to acquire stock at insider prices are sometimes issued to people running the business where they could benefit from their positive performance.
There is a variation to the above and it is what Warren Buffett usually does. He invests a small portion for the common equity and a much larger amount for preferred equity or stock. The preferred stock pays a higher than usual dividend and can be redeemed at a fixed point in time or converted to common stock. He did this with Coca-Cola, Bank of America, General Electric, Goldman Sachs, Heinz and too many others to mention. With the preferred he is guaranteed a dividend (which is federally taxed to Berkshire Hathaway at only 10.5%), gives up a little of the upside but can reap the benefits of substantial growth in the value of the common stock.
Consider this column as Business Acquisitions 101. Now you can follow the intrigue with Derek and Jeb, or any other acquisition, a little easier.
How Can We Help?
