Management by Baseball

Most observers who saw the Boston Red Sox bid ~$51 million to Japan' Pacific League Seibu Lions for nothing more than the rights to negotiate with star Lions' pitcher Daisuke Matsuzaka (not a penny of that for actual salary, amount to be negotiated) saw madness in their method. The $51 million is about three years pay for a very very highly-paid starter. So on the surface, it was rational to think any deal needed to be very long-term (to amortize that $51 MM over a bunch of seasons. It was also widely assumed that this put Matsuzaka's super-capable agent, the widely-disliked Scott Boras, in the catbird seat -- after all, if a team is paying that much money just for the rights to negotiate, they must think he's worth a ton of currency -- and that means Boras should be able to nail them for a big paycheck for the lad. And the negotiations can't go on for a long time because the deal needs to get resolved soon or else the bid is void: the pitcher returns to the Lions for a lower-than-MLB equivalent salary, the Lions' windfall $51 million returns to the Red Sox, and since no other MLB team can sign the pitcher, Boras comes away with little or nothing.

For the interested+unitiated, details on the mechanics of the process major league teams follow to sign Japanese players is here.

But if Joe Sheehan over at Baseball Prospectus is right (and I suspect he is), the Boston Red Sox offering that off the planet offer for bidding rights is actually a double-edged sword. It's conceivable that the vast amount of bidding-right money is actually forcing the Seibu club to apply pressure on Matsuzaka to take a below-market deal, and I'll explain the mechanics a little later. But it may turn out that a big bid means less money may actually change hands than if the bid had been more "reasonable". Specifics of the posting system play a part, but you may be able to use this technique in your own beyond-baseball negotiations as a buyer, especially when there are more than two alignments in the confab (as with Matsuzaka, Boras, the Lions and the Red Sox, no two of which have identical interests.

Let's start with a rough but widely understandable analogue to the Lions/Red Sox/Matsuzaka/Boras quartet. Let's say you have a cool house in a neighborhood that doesn't have a lot of comparable homes but homes when they do sell go for $175,000 to $300,000. You might be dreaming 300K or even 315K.Your agent thinks it's worth $250,000 and asks $264,500 so there's some negotiation wiggle room. You put it on the market and within a few weeks, you get an offer for $450,000, but only if you close within 30 days. Off the planet. Fifty percent higher than the highest other buyer had paid for a home in your neighborhood. What does it mean for each of the three parties?

For the buyer, there are not any likely competitors.
For the agent, it looks like a quick, easy payday, & she's already counting the cash.
For the seller, it looks like a big payday, & he already counting the cash.

If as a seller, your agent has ice in her veins and you do, too, you know this is a good sign but by no means a winning MegaMillions ticket. Most people don't have ice in their veins, and this is as true in a business-to-business negotiation as it is in a person-to-person or person-to-business transaction.

The buyer is virtually alone now. If a half dozen prospectives had come into the bidding with offers around the asking price (above or below), the agent could have set them against each other. A not uncommon scenario played out in my neighborhood last summer when the winning bidder started below the asking price but ultimately got their house by being $80,000 over the asking price, what was required to "win" the auction-like tussle.

But the buyer is virtually alone now. And if the buyer starts playing time and putting on the squeeze, the buyer's and agent's expectations/dreams of a big payday (and the agent's need to make it worthwhile by getting quick closure) forces apart to some degree the commonality of interests between the seller and the agent. If the buyer says after he gets an inspection, "Well, you have to make this improvement," or "You have to give me $20,000 to cover the repair of this", or any one of dozens of ways to shift the loan or ding the seller's margin, he can use the natural anxiety he's created with the massive offer to make the seller anxious and the agent more so. More often than not, the agent pressures the seller on behalf of the buyer's revised offer.

I've actually seen a seller agree to four rounds of "final" multi-thousand dollar requests on a real estate deal before getting the sale done. I have a (mercifully ex-) client who as buyer made an assembly house eat their hearts out six times after making a stunningly generous initial offer. It takes a lot of smudge to darken the stars in the seller's eyes if the offer is big enough.

BACK TO SEIBU
So this is a little of Sheehan's interesting commentary (to get the :

There wasn’t any movement yesterday, just a bunch of posturing. Amidst that, however, there were some highly amusing sequences. First, there was this in the Boston Herald:

“We have sent a formal offer to Matsuzaka and his agent Scott Boras,” Lucchino said after meeting with attorneys representing the Seibu Lions. “I believe it is fair and comprehensive, and offers a great deal of security and a substantial level of compensation.”

Now, I can’t speak for any of you, but that sure reads to me like, “and nowhere near the market value of top-tier starters.” Four years and $36 million could be security and substantial compensation, and a time zone shy of the going rate for a pitcher of Matsuzaka’s caliber. If you try and offer him Gil Meche/Ted Lilly money, I seriously doubt you’ll be able to bring him in, not when his comps look a lot more like guys getting 5/75 and more. Adam Eaton just signed a three-year deal for $24 million, and he’s never had an ERA below 4.00 or thrown 200 innings in any season. Matsuzaka is, um, better than that.

Of course, if the Sox sign Matsuzaka, they’re on the hook for $51 million over and above whatever they pay him. A 4/36 deal for him is a 4/87 deal for them, and 5/50 is 5/101, and so on. The $51 million isn’t subject to the payroll tax, so that’s a small benefit, but that money is a huge elephant in the room. The point I argued so poorly two weeks ago is this: if the Red Sox try and make that posting fee Matsuzaka’s problem, they’re not going to be able to sign him. He has no reason to care about that money; he’s not going to see any of it. From their standpoint, they have every reason to make it an issue, because if they invest an average of $19 million a year or more in the right-hander, it’s very hard for him to earn that back for them. It’s quite the standoff.

{SNIP -- the rest of the article requires a Baseball Prospectus subscription}

Let me add a note, too, on seller desperation: the Lions' corporate sponsor, the Seibu Railway Co., has been struggling, and the baseball team (not their biggest hassle) loses about $19 million/year, according to a Business Week article by Ian Rowley from last year.

Sheehan makes some solid observations in the rest of the piece.

• The Lions are over a barrel because they really need/want the cash more than they want/need Matsuzaka, so they are pulled to negotiate for the Red Sox and against the pitcher and his agent. Their interests have been forked.
• That if the choice for the Lions becomes nothing or, say, $36 million (probably the ceiling of what they would have expected before bids were made), they have every reason to go for less, even if it means subsidizing the pitcher's Red Sox paycheck with a giveback that ends up paying some of his salary.
• That for the teams the Red Sox outbid, it's angst time because the Red Sox, even with the off the planet bid for the rights to negotiate, may end up getting Matsuzaka at a total cost (bid rights + player contract) that is below what they themselves had budgeted.

He doesn't mention the additional twist of lemon in the espresso: It diminishes the value of the deal to agent Boras, and makes him look less clever than he almost always looks.

BEYOND BASEBALL
A deal like this is almost always a poisoned-well deal for the buyer, one that precludes doing business with the other parties again. It's not the other parties will always refuse, but they will load on lots of overhead in subsequent negotiations t defend themselves against tricks. The assembly house, by the way, did business with my client again, in part because their offshored labor costs were so low, they could make money just be keeping throughput up.

And in the case of the Red Sox, they will probably never deal with Seibu again, and Boras, puckish trickster that he is himself, may be the kind of person who actually finds it cute or admires their acuity. And he certainly won't bite off his nose to spite his face and refuse to do business with the second best-funded team in the majors.

Strange but true: In the end, a bumper bid can be a weapon against the seller.