Knicks' Lin-sane Trade Could Prove a Financial Air Ball for MSG
byJul 23rd 2012 11:52AM
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.
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.