Three Reasons Why Former Microsoft CEO Steve Ballmer Might Be Wasting $2 billion – And Three Why He Might Not

Steve Ballmer, the recently-retired former chief executive of Microsoft, is spending $2bn on buying the Los Angeles Clippers NBA franchise – a record for a professional basketball team. The purchase follows an unsuccessful tilt at the Sacramento Kings basketball outfit last year and cements a life-long passion for Ballmer, who regularly played hoops with colleagues at a public gym near Microsoft’s Seattle campus until recent years. Yet, business and sport have often been uneasy investment bedfellows. Here are three reasons why he might regret the outlay.

1) Sports franchises are a money pit. Roman Abramovich is believed to have spent $2 billion on English Premier League side Chelsea, which he bought 11 years ago and has won three domestic league titles and one European Champions League under his ownership. Still, the club won no major trophy last season and took nine years to post an annual profit under Abramovich’s ownership. Meanwhile, Sheikh Mansour of Abu Dhabi has poured more than £1 billion into Manchester City. The club has just won its second English Premier League title under his six-year ownership but has been fined £49 million under the Financial Fair Play rules of European football’s ruling body UEFA, which are aimed at stopping clubs risking their futures by spending beyond their means. Despite the introduction of these regulations, English Premier League clubs spent about £130 million in this year’s January transfer window, according to accountants Deloitte. Still, the figure has nearly halved from £225 million two years earlier.

2) Investing in sport teams risks alienating their fans

“Rich investors pump their money into clubs (and are often welcomed for doing so) but then think they have a plaything that they can do with what they want,” complained Peter Sharkey in the Birmingham Post’s Business of Sport column last year. There is plenty of evidence for his assertion. A section of Manchester United supporters pulled their support after Malcolm Glazer’s takeover of the club in 2005, setting up a rival club in local leagues and encouraging supporters at the Old Trafford ground to wear gold and green scarves signalling their unhappiness with the new owners. At Hull City, owner Assem Alam has enraged the club’s fans for trying to change the name of the 110-year-old club to Hull Tigers. Mike Ashley, the founder of Sports Direct International, the retailer that owns the Dunlop Slazenger and Lonsdale sports brands, similarly outraged fans of Newcastle United by changing the name of the historic St James’ Park ground to the Sports Direct Arena. The name has since been changed back by the club’s sponsor.

3) Bad things can happen to people who invest in sports teams.
Sports ownership is associated with more than a fair share of scandal. Robert Maxwell, the publishing tycoon who once owned football’s Oxford United, famously drowned off his yacht off the Canary Islands in 1991, just as his raids on the pension funds of his printing and newspaper companies were about to be exposed. Owen Oyston, the majority shareholder in Blackpool Football Club, was given a six-year jail sentence after being convicted of rape and indecent assault in 1996. And Michael Edwards, the former Manchester United chairman whose family owned the club before it began listing on stock exchanges, received a police caution in 2002 after a woman in her 40′s alleged that he had spied on her under one of the cubicles in a ladies’ toilet.. Sports ownership has also seen tragedies. Matthew Harding, the insurance broking millionaire who invested £26,5m in Chelsea Football Club in 1994 and became the club’s vice-chairman, was killed in a helicopter crash whilst returning from watching his team play Bolton Wanderers in 1996.

Alternatively, Ballmer may just know what he is doing. Here’s a trio of reasons why his Clippers purchase might be a success.

1) Other billionaires also seem to think it’s a good idea

Ballmer’s winning bid, raised from an initial offer of $1.8 billion, is the second highest price paid for an American sports team franchise, behind the $2.15 billion paid for baseball’s Los Angeles Dodgers in 2012. However, other business celebrity interest seems to have pushed up the price with Ballmer appearing to have outbid a group led by media tycoon David Geffen and including Oracle chief executive Larry Ellison and TV talk show host Oprah Winfrey which offered about $1.6bn. A group of Los Angeles investors are also said to have bid $1.2billion. Sports marketing experts cite a shortage of quality sports franchises, as well as a glut of demand from wealthy business people with a passion for sport. “It’s no wonder the prices are so high,” Ed Desser, a former president of NBA Television and New Media Ventures who now works as a sports consultant, told The Guardian newspaper. “There just aren’t enough sports teams for all the billionaires who want them.”

2) Some investors seem to have made decent money in recent sports deals. The late Malcolm Glazer was almost universally slated for paying £790 million to buy Manchester United after making a hostile takeover bid in 2005. Much publicity was given to the high leverage in the bid, which was partly funded by expensive payment-in-kind debt. Yet, United, which is now run by Glazer’s sons Joel and Avram, is now valued at $2.7 billion on the New York Stock Exchange, where 10 per cent of its shares are listed. The remainder is still owned by the Glazer family, which is expected to make a hefty profit of any eventual sale.

3) He can afford it. Ballmer, who is 58 and was the 30th recruit in Microsoft’s history, joining his Harvard friend Bill Gates at the company in 1980, retired as chief executive of the company in February but remains on the board and still owns about 4 per cent of the group, worth about $13.4bn – enough to buy the Clippers nearly seven times over.

Is sports club ownership by executives who have made their money in other walks of life a sign of a canny business mind or an enlarged ego? Let me know what you think.

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