Steve Ballmer bought the Clippers for $2 billion last week, pending any crazy lawsuits by Donald Sterling. At Time, economist Andrew Zimbalist writes that the team would only be worth $512 million based on a 4x multiple of their revenue last year, and $720 million based on the growth he anticipates in their next television contract. “This reflects an enormously wealthy person buying a toy,” said Lawrence Mishel, president of the Economic Policy Institute, via the LA Times. “It’s not a financial investment.”
Zimbalist also used the “toy” metaphor. The economists are probably right that the Clippers aren’t worth nearly what Ballmer paid for them on a fundamental basis, but there are some flaws in their arguments. Zimbalist cited Forbes’ revenue numbers in his calculations, but oftentimes those statistics are at best an educated guess — before the sale, they had valued the Clippers at $575 million, which, as we know, was less than 30% of Ballmer’s bid.
Pragmatically, the Clippers are worth at least $1.6 billion, which was the bid by the prospective ownership group led by Oprah and David Geffen — Steve Ballmer could sell the team for at least that tomorrow. So Steve Ballmer paid a $400 million premium for his toy, but he didn’t overpay by $1.3 billion. In the meantime, he has ownership of a team in a major market that should contend for the foreseeable future. How often does a team with two stars like Chris Paul and Blake Griffin, in their primes, come up for sale?
Ballmer may have bought into a bubble, but there are only 30 NBA teams. As the game continues to grow on a global scale, its franchises will continue to be worth more to egoist buyers than traditional businesses are valued on a profit and loss basis.