Sport Finance: Chapter 9

External factors that can affect the value of professional sports teams include the following: (1)

-Antitrust decisions affecting the league -Labor disputes and unwillingness of players to cross the picket lines to play -Environmental regulations affecting the arena -A change in workplace safety rules that apply to operating the team

Publicly Traded Sport Companies (2)

-Baltimore Orioles - went on a roller-coaster ride in the 1970s, with their stock price ranging from $8 to $25.50. In 1979 the team went private, with liquidation value earning shareholders $49.60 per share over a three-year period. -Milwaukee Bucks - went public in 1968 for $5 per share and went private for $12 per share 11 years later.

Publicly Traded Sport Companies (1)

-Cleveland Cavaliers - went public in 1970 for $5 per share, but shares dropped to as low as $0.50 per share in 1982. The team went private in 1984 for $1.25 per share. -New England Patriots - went public in 1960 for $5 per share and went private in 1976 for $15 per share.

Shares can be sold to five possible types of buyers:

-Existing shareholders on a pro rata basis -Investment bankers, who will then sell the shares to the general public in an IPO -Several major purchasers in a private placement -Employees in an employee stock purchase plan -Buyers in a dividend reinvestment plan

Going Public: Disadvantages

-Increased operating costs are associated with all the quarterly and yearly reporting requirements. -The company is required to disclose sensitive data that a competitor can use against the business. -Self-dealing and nepotism are not allowed. -There is a risk that the value of shares will drop if the market for the shares is slow and they are not traded enough or if the company or its sector falls into disfavor. -Loss of control of the business is possible if investors acquire enough stock.

Financing a Company Through Stock: Disadvantages

-Issuing bonds or commercial paper provides a predictable fixed cost for repayment in contrast to stocks, which represent a stake in the company's future profits. -The costs associated with issuing stocks and all ancillary activities can make issuing common stock more expensive than issuing preferred stock or debt instruments. -Some investors may see issuing new stock as a negative sign that the company needs to sell more of itself in order to survive.

Common Stock

-Most frequently issued and utilized -Represent an equity ownership right in a company -Low on the repayment list after secured creditors are repaid and holders of preferred shares are paid

External factors that can affect the value of professional sports teams include the following: (2)

-New rules related to employment practices in the workplace, such as the classification of food vendors as employees rather than independent contractors -The folding of a rival league or the success of another league

Going Public: Advantages

-Owners are allowed to diversify their investments instead of having all their assets locked into the company. -A liquid asset is created (a privately held company would be harder to sell). -Going public helps raise new cash for growth. -A value for the company is established based on the combined value of outstanding shares.

Mutual Fund

-Purchase numerous shares of various stocks using money from various investors including institutions and individuals -Specialized mutual funds that can invest in sport stocks, social equity stocks, global stocks, or aggressive growth stocks -Might have millions of shares in hundreds of stocks; professional administrators of each fund analyze each stock and try to pick the best time to buy or sell the fund's shares

Shareholder Rights: Voting Power

-Stockholders have the right to elect board members. -Each shareholder is entitled to one vote for each share held.

Other benefits that are available for preferred stockholders include the following: (2)

-Strong redemption provisions -Subscription privileges to future stock offerings -The right to convert preferred stock to common stock

Other benefits that are available for preferred stockholders include the following: (1)

-The right to dividend payments before common stock shareholders receive dividend payments -Preference as to assets in distribution -Voting power for preferred stock, available under limited circumstances

Financing a Company Through Stock: Advantages

-There is no fixed cost associated with issuing stock, whereas a company that issues bonds or commercial paper will have to allocate a fixed amount in the budget for debt service. -Common stocks do not carry any fixed maturity date at which they need to be paid. -Issuing common stock can help raise new capital without affecting the company's bond rating. -At times, such as when interest rates are low and the demand for bonds is also low, it is easier to sell common stock.

Shareholder Rights: Preemptive Right

-This protects a stockholder's power of control and prevents dilution of the stock's value. -The right to exercise control over a business is one of the primary purposes. -If you own 10% of the business, you are entitled to purchase 10% of the newly issued shares.

Shareholder Rights (6 & 7)

-To obtain information from the corporation to help safeguard the stockholders' investment (such as an annual report) -To subscribe pro rata to new shares of company stocks when authorized by law (commonly referred to as stockholders' preemptive right)

Shareholder Rights (4 & 5)

-To receive disbursements on a pro rata basis when a partial or complete liquidation of corporate assets occurs -To bring action on behalf of the corporation against board members who do not act in the corporation's best interest (commonly referred to as stockholders' derivative actions)

Shareholder Rights (1-3)

-To transfer the stock freely, within limited rules -To exercise the right to vote in person or by proxy as set forth in the corporation's bylaws -To receive dividends and other disbursements on a pro rata basis according to the number of shares held

Internal factors that can affect the value of professional sports teams include the following:

-Trading a star player or hiring a new coach -Increasing the number of preseason games -Borrowing money for expansion or issuing more stocks -Declaring a dividend -Consolidating television and radio broadcasting operations in-house

Increasing Stock Value

A business increases in value through a rise in the value of its shares

Preferred Stock

Carries a dividend preference in relation to common stock -Dividend is cumulative in that if it is not paid to holders of preferred stock in a given year, the next year the corporation will owe two years' worth of dividends.

Sport Stocks

GB Packers - one of the most well known (American) public sports teams: -Very limited number of shares; sale of shares happens only on occasion -Not traded publicly on the market

Defensive Tactics

Hostile Takeover Golden Parachute Contracts Warrants

Warrants

Management can buy shares at the fixed warrant price, which will allow them to purchase more shares; can discourage hostile takeover attempts

Going Public

Must determine whether the stock will be publicly traded -Just because a company has issued stock and has gone public does not mean the shares will be available to the general public. -Small corporations may have only a few shareholders, such as family members. Must decide whether to list the shares on a major exchange or to have unlisted shares traded on the over-the-counter (OTC) market

Shareholder Rights: Holding Companies

Parties can obtain control by investing in a company. -For example, a company that has one million outstanding shares can be effectively controlled by anyone who purchases 50.01% of the voting stock.

Shares will go through three possible phases once the decision to go public is made:

Phase 1: initial public offering (IPO) -The purpose of the IPO is to raise new capital for the business and to put money into the owner's hands. Phase 2: secondary market -Stocks are bought and sold for all publicly traded businesses after the IPO. Phase 3: primary market -Exists for companies that have already had an IPO but want to issue more shares to generate additional funds.

Golden Parachute Contracts

Require huge payments to executives if they are terminated; can make a company less attractive to any potential takeover attempts

Selling Shares

Subscription: Selling to prior shareholders. Initial public offering (IPO): -Includes private placement -SEC regulations

Hostile Takeover

Unwelcome attempt to purchase the shares of a company

Sport Stocks: Pure Play

corporation that participates in only one industry segment -For example, Boston Celtics or Cleveland Indians (when they were public)

Sport Stocks: Blended Company

encompasses a team and other unrelated businesses -For example, Disney & ESPN, Comcast & Philadelphia fliers & Sixers