Knicks' Lin-sane Trade Could Prove a Financial Air Ball for MSG

Jeremy Lin
Say you own a struggling business and out of nowhere -- as if fallen from the heavens -- appears a savior. Overnight, your company is transformed. Sales are through the roof. The media, not just here but across the globe in China, have made you a sensation. Your brand is suddenly injected with meaning not seen in nearly a generation; it's all people are talking about.

What do you with this man who so swiftly reversed your fortunes?

If your name is James Dolan and you're the chairman of Madison Square Garden (MSG), apparently you just shrug and let him walk away.

Sorry, Kiddo, It's Time to Say Goodbye

That's what Dolan did last week when he passed on an option to keep Jeremy Lin with the New York Knicks, and under the auspices of Madison Square Garden, which owns the team.

Lin, of course, is the young Taiwanese-American who went from a basketball nobody sleeping on his brother's couch to an international celebrity. His rise was epic, leading the flailing Knicks on an improbable seven-game winning streak, dazzling fans with a game-winning three-pointer against Toronto, and dropping 38 points on Kobe Bryant's Lakers during the dramatic run.

Despite Lin's heroics, the Knicks felt they had better ways to spend their money. The historically profligate front office called the decision a financial one, and a look at the numbers might explain why.

It's All About the Benjamins

The Houston Rockets, Lin's new team, had signed him to an offer sheet for $25.1 million over three years, which the Knicks would have had to match in order to keep their sudden superstar. But doing so would mean New York would have to cough up much more than that, because the Rockets designed the contract to blow up the Knicks' salary cap, with a third-year balloon payment of $14.9 million that would've cost the Knicks an additional $35 million in salary cap penalties.

Some called it a basketball version of the poison pill.

Of course, the Knicks could have initially signed Lin for much less, but told him to find a competing offer. The team could have also made room under the salary cap, for example, by putting one of their big-money players like Carmelo Anthony, Amare Stoudemire, or Tyson Chandler on the trading block, or through any number of other financial contortions.

Knicks fans, who have been waiting a decade for a winner, quickly took to the Internet to blast the decision, calling management stupid and renouncing their support of the team.

Booing and hissing on the Street
Investors seemed equally disgusted, sending MSG shares down 13% as rumors of Lin's departure turned into reality. That drop accounts for a loss of about $314 million in market value; before that fall, MSG stock had climbed 35% since Lin came on the scene.

Yet analysts were indifferent to the market reaction, with most saying the move will only have a marginal effect on MSG's profits.

What the Wall Street number-crunchers seem to be forgetting is that sports teams are littered with overpaid flops. It always pays to be a winner though, and Lin's intangible value also needs to be factored into the equation.

A Harvard grad, Lin's rise is as an unlikely a story as any, and with his injury-shortened season last year, many were anxious to see if his sophomore effort could top the first. Lin's jersey led the league in sales, an honor usually held by perennial all-stars and a rough proxy for the league's biggest ticket draw. He doubled the Knicks TV ratings, forced an end to a dispute with Time Warner Cable (TWC), and made the franchise a favorite in China.

With the decision to let Lin go, Madison Square Garden management may be alienating its customers at the most untimely moment. As the Nets arrive in Brooklyn this year, New York's basketball aficionados will have a new team to root for just a short subway ride from the Knicks' home.

Somewhere, Nets owners Jay-Z and Mikhail Prokhorov are surely smiling.

Motley Fool contributor Jeremy Bowman holds no positions in the companies in this article. The Motley Fool owns shares of Madison Square Garden.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum

15 Comments

Filter by:
Jon!

I don't blame Lin, I blame the Knicks. It was a foolish and stupid move. They should have given him whatever he wanted because INTERNATIONAL sales would supercede the costs. Lin didn't drop the ball, the New York Knicks did. I won't be watching anymore.

July 24 2012 at 8:13 PM Report abuse rate up rate down Reply
jeviga

Lin had the grit, the guts and the talent to have stayed in NY. He is an appealing and decent young man who, unlike so many NBA players, wind up in trouble with the law. Since Dolan let him go at least the kid will be raking in the cash in Houston and deservedly so.
Good Luck Jeremy

July 24 2012 at 8:37 AM Report abuse rate up rate down Reply
B.Gee

Any coincidence that MSG (Monosodium Glutamate) is the basis of much Asian food? If so, the other MSG (the one with seats) will probably be hungry again in 2 hours.

July 24 2012 at 7:59 AM Report abuse rate up rate down Reply
RICHARD BONNET

I am correcting my recent comment on THE LUXUERY TAX FOF LIN.
Iwas wronmg, the LUXERY TAX WAS NOT IMLEMENTED BY NEW YORK CITY.
I stand corrected.The LUXERY TAX IS A TAX BY THE NBA TO TAKE THE MONEY
AND RE-DISTRUTE THE MONY AMONG THE TEAMS WHO CANNOT PAY AS MUCH MONEY AS THE TOP PAYING TEAMS.
IT ALSO APPLIES TO OTHER TEAMS. THE YANKEES PAY A LARGE LUXERY TAX TO SAVE THEIR HIGH PAID PLAYERS.
LOOK UP sPORTS LUXERY TAX" ON GOOGLE.
SORRY, I DID NOT INTENTIONLY MIS-INFORM YOU----SORRY

July 23 2012 at 10:55 PM Report abuse rate up rate down Reply
RICHARD BONNET

You left a very importent fact out in your story.The only way that they could have sighned
Lin is that the KNICKS would have had to pay a New York City LUXERY TAX,bringing the
cost to the KNICKS up to 58 Million.
SO MUCH FOR MAYOR BLOOMBERG AND NEW YORK CITY TO TAX THE RICH.
There has been many deals with sport figures which have fallen through because of
this policy.

July 23 2012 at 10:33 PM Report abuse rate up rate down Reply
Hi Al

Lin in order to be effective drove through the lane and took alot of hits. He did make some incredible outside shots, but phsically over time broke down because of the contact. He forced up quite a few shots and took the hits. I do not beleive he can be last a full season without getting hurt again. He also said that it wasn't about the money, but why did he visit Houston a second time to up his contract. He basicaly dissed Dolan who was willing to match the first offer. I say good ridance.

July 23 2012 at 8:31 PM Report abuse rate up rate down Reply
dearthaircroi

Another meaningless article. First of all us Knicks fans have been waiting since 1973 for a winner. And while it maybe turn that at first the stock of MSG may be a lot lower then a week ago , that won't last . Houston is going no where fast and the Knicks at least have a chance to turn out a respectable season.

It won't take long for Lin to realize that he is the one that made the biggest mistake.

July 23 2012 at 6:38 PM Report abuse rate up rate down Reply
1 reply to dearthaircroi's comment
mail4warding

how do you make a $25 million mistake?

July 23 2012 at 7:38 PM Report abuse rate up rate down Reply
1 reply to mail4warding's comment
DocLagos

and into one's Bank Account!!! Lin is a WINNER, and way you look at it, Go Lin!!!

July 23 2012 at 8:06 PM Report abuse rate up rate down
John Adams

No the new coach said it when he took over last year if you dont remember,That Lin will not play on my team,because right after he took over he had to make a statement takeing it back,o ya we want lin here,and then all a sudden Lin was our for the year,when you have as many egos on this team there is no way they will let one guy be that popualer,He turned this team around and brought back so much excitement back to the garden even my little kids and there friends where watching the games again,and after Dolan and the higherups made there millions off of Lin and it was time for him to get paid a little they more then happy to see him go,but the fans are not but then its not about the fans is it

July 23 2012 at 6:00 PM Report abuse rate up rate down Reply
Doug Mullen

Perfectly written article. The Nets have a new fan!

July 23 2012 at 5:54 PM Report abuse rate up rate down Reply
Paul R.Antioco

In other words, The N.Y taxpayers should have Lin and
have already paid for Lin, except its went into Dolan's
Billionaire pockets!!!
Typically, these People Threaten the City that they'll leave.
I say, Don't let the Door hit you where the Good Lord split you!

July 23 2012 at 3:45 PM Report abuse rate up rate down Reply