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Forbes Owes NBA Owners an Apology

Forbes recently released its World's 50 Most Valuable Sports Teams for 2014 to much fanfare. And if you haven't seen the list, football is really popular. NFL teams occupy 60% of the top 50. But it's the other version of football, soccer, that occupies the top three spots, with Real Madrid taking the top billing.

Basketball didn't fare as well. The New York Knicks were the highest-valued NBA team, but failed to crack the top 10, coming in at No. 13 with a valuation of $1.4 billion. There was just one problem with this list: Steve Ballmer agreed to pay $2 billion for the Los Angeles Clippers two weeks before the Forbes' report was released, and Forbes valued the team at a mere $575 million  -- good for 13th place among NBA clubs.

In defense of Forbes
Valuating any asset is hard. Not only do you have to account for cash flows -- and in the case of sports teams, from many different sources -- you also have to predict the growth and persistence of those cash flows. And if that isn't hard enough, you have to assign a value that a rational [emphasis added] investor will agree to pay for those cash flows.

Sports teams present a particular conundrum on a multitude of fronts using that definition. First, in many cases, private entities are reticent to disclose cash flows for the purpose of valuation. In addition, the popularity of sports has exploded in recent years, making it hard to model future growth. Finally, and most importantly, buying sports clubs tends to be more of a hedonistic exercise than a rational investment -- and you can't model self-indulgence.

Further complications
Further complicating things is the lack of comparable sales. Much like a home sale, a team is valuated on recent transactions. Recent transactions were in line with Forbes' valuation -- in 2013, the Sacramento Kings were sold for a then-record $535 million, and in 2014, the Milwaukee Bucks were sold for $550 million.  Not to mention, many remember the sad story of the New Orleans Pelicans -- then the Hornets -- in which the league had to repurchase the team for nearly two years.

Of course, there simply aren't enough transactions to do a transaction-based model. Stretching the home analogy, more transactions are better from a price- and value-discovery standpoint. Through a multitude of transactions, one can ascertain what value the market (read: rational investors) assigns to your home. While there are differences between properties -- much like the differences between NBA teams -- we can sort out those differences over many transactions.

Steve Ballmer has 2 billion reasons why other NBA owners love him. Source: Wikimedia Commons

What Forbes should have done
Ballmer made a bonafide offer to buy this team two weeks before Forbes' report, and it was accepted by the NBA. While one can't fault Forbes for losing track of the absolute circus that led up the forced sale of the team, it should have collected the data, revalued all NBA teams under both scenarios, and awaited the outcome.

For what it's worth, the company addressed the transaction as substantive in a write-up, but calls it an outlier, noting that other bids, at $1.6 billion and $1.2 billion, are more than double the magazine's assigned value for the team -- and that it's held up in the courts.

Price isn't value, nor is value price, but a large transaction like this is substantive to the value of the L.A. Clippers and NBA teams – and owners – even if Ballmer is overpaying for the Clippers.

An interesting aside is that Forbes itself was recently involved in a private transaction, selling a controlling stake to a Hong Kong consortium. I bet it would have waited for a large, positive comparable transaction before it submitted the company for valuation purposes.

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Jamal Carnette

After working at The Motley Fool, Jamal Carnette decided to try his hand at writing for a change. You can find him writing about technology, consumer goods, sports, and pontificating on any competitive advantage. His previous jobs include Mortgage Trainer, Financial Advisor, and Stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance and is a CFA Level III candidate. Follow me for tech trends, info on consumer brands, and sports banter.

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