Practical Applications ofPractical Applications ofCorporate FinanceCorporate Finance

Presentation to Finance 321Presentation to Finance 321

University of Illinois at Urbana-ChampaignUniversity of Illinois at Urbana-Champaign

March 27, 2007March 27, 2007

Today’s DiscussionToday’s Discussion

Case study: Case study: A-Rod – Signing the A-Rod – Signing the Best Player in BaseballBest Player in Baseball

My career in finance: a perspectiveMy career in finance: a perspective

Today’s DiscussionToday’s Discussion

Case study: Case study: A-Rod – Signing the A-Rod – Signing the Best Player in BaseballBest Player in Baseball

My career in finance: a perspectiveMy career in finance: a perspective

Assessing ValueAssessing Value

Is this 25-year-old baseball player worth Is this 25-year-old baseball player worth one quarter of a billion dollars?one quarter of a billion dollars?

Key themesKey themes

Key issueKey issue

What are the incremental benefits that What are the incremental benefits that will accrue to the Rangers over the life of will accrue to the Rangers over the life of the contract – and beyond?the contract – and beyond?What characteristics does this asset What characteristics does this asset possess that make it attractive?possess that make it attractive?– Uniqueness/rarityUniqueness/rarity– ComplementarityComplementarity– AppropriabilityAppropriability– Life-cycle value creationLife-cycle value creation

What can be done during the What can be done during the ownership/disposal phases to enhance ownership/disposal phases to enhance the value of this asset?the value of this asset?What are the key risks in buying this What are the key risks in buying this asset – and how can they be mitigated?asset – and how can they be mitigated?

Key considerationsKey considerations

6.1 7.7 6.2 6.8 6.1 8.5 6.9

24.4 22.2 35.6 27.8 22.3 25.2 24.1 25.7 25.1

69.5 70.1 63.4 66.0 70.9 72.1 69.8 68.0

2.71.0

65.8

Home runsHome runsBase hitsBase hits

Strike Strike outs/walkouts/walk

ss

At At bats bats

100% 100% ==

Source: Baseball Almanac

Hank Hank AaronAaron

12,3612,3644

Barry Barry BondsBonds

9,5079,507

Ty CobbTy Cobb

11,4311,4344

Lou Lou GehrigGehrig

8,0018,001

Ken Ken GriffeyGriffey

8,2988,298

Ricky Ricky HendersHenders

onon

10,9610,9611

Willie Willie MaysMays

10,8810,8811

Babe Babe RuthRuth

8,3998,399

Alex Alex RodriguezRodriguez

2,9302,930

Record Offensive StatisticsRecord Offensive Statistics

AverageAverageHighHigh

AverageAverageHighHigh

AverageAverageHighHigh

.355.355 .370.370 .420.420 .374.374 .327.327 .327.327 .347.347 .393.393 .358.358

.305.305 .299.299 .366.366 .340.340 .291.291 .279.279 .302.302 .342.342 .314.314

132132 129129 127127 184184 146146 7474 141141 163163 132132100100 9292 8181 117117 8989 4545 8787 101101 115115

3131 5252 9696 1717 2424 130130 4040 1717 46461010 2424 3737 66 1010 5656 1515 66 2525

BattingBatting

RBIRBI

Stolen basesStolen bases

2323 2121 2424 1717 1818 2525 2222 2222 55Career Career (years)(years)

On-Base and Slugging StatisticsOn-Base and Slugging Statistics

On-base percentage Slugging averageAverage High Average High

Ted Williams .482 .553 Babe Ruth .690 .847Babe Ruth .474 .545 Ted Williams .634 .901Lou Gehrig .447 .538 Lou Gehrig .632 .769Barry Bonds .443 .609 Barry Bonds .608 .863Ty Cobb .433 .468 Alex Rodriguez .576 .631Ricky Henderson .401 .469 Ken Griffey .557 .674Willie Mays .384 .425 Willie Mays .557 .667Alex Rodriguez .380 .420 Hank Aaron .555 .669Hank Aaron .374 .410 Ty Cobb .512 .621Ken Griffey .374 .408 Ricky Henderson .419 .577

Analytical FrameworkAnalytical Framework

Spaces/ purchases

Average price$18.00

Tickets

Average price$2.50

Average price$1.80

Items

Parking/concessions revenue

Incremental revenue $10 million

Merchandise revenue

Ticket revenue

Probability7.0%

Probability3.5%

Incremental revenue$10 million

Incremental revenue

Franchise multiple

3.0x

“Glamour factor”

$100 million

Value

x

+

+

Live gate revenue

Sponsorships $1 million

World Series revenue

Broadcast revenue

ALCS revenue

Revenue lost to revenue sharing

17.5%

+

+

+

+x

x

+

+

x

+

x

+

x

*Additional assumptions: discount ate = 8.0%, inflation rate = 3.5%, baseline salary inflation rate = 16.5%, interest rate on deferred money = 3%, tax rate = 40%, contract insurance = 10.0%

• Regression analysis:

45,000 additional

attendees per win

• Eight (8) additional

wins

DCF Analysis of Rodriguez SigningDCF Analysis of Rodriguez Signing2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Incremental benefits

Incremental attendance 360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000 ALCS incremental revenue 700,000 724,500 749,858 776,103 803,266 831,380 860,479 890,595 921,766 954,028 World Series incremental revenue 350,000 362,250 374,929 388,051 401,633 415,690 430,239 445,298 460,883 477,014 Ticket sales 6,480,000 6,706,800 6,941,538 7,184,492 7,435,949 7,696,207 7,965,575 8,244,370 8,532,923 8,831,575 Parking/concessions 900,000 931,500 964,103 997,846 1,032,771 1,068,918 1,106,330 1,145,051 1,185,128 1,226,608 Merchandise 648,000 670,680 694,154 718,449 743,595 769,621 796,557 824,437 853,292 883,157 Broadcast revenue 0 0 0 0 0 0 0 0 0 0 Sponsorships 1,000,000 1,035,000 1,071,225 1,108,718 1,147,523 1,187,686 1,229,255 1,272,279 1,316,809 1,362,897 Revenue lost to revenue sharing

(1,588,650)

(1,644,253)

(1,701,802)

(1,761,365)

(1,823,012)

(1,886,818)

(1,952,856)

(2,021,206)

(2,091,949) (2,165,167)

Increase in franchise value134,710,33

8

Total benefits 8,489,350 8,786,477 9,094,004 9,412,294 9,741,724 10,082,685 10,435,579 10,800,824 11,178,853 146,280,45

1

Incremental expenses

Salary for replacement shortshop 3,000,000 3,495,000 4,071,675 4,743,501 5,526,179 6,437,999 7,500,268 8,737,813 10,179,552 11,859,178

Salary plus signing bonus 23,000,000 23,000,000 23,000,000 23,000,000 27,000,000 25,000,000 27,000,000 27,000,000 27,000,000 27,000,000 Cash outlay (ex deferred interest) 18,000,000 19,000,000 20,000,000 20,000,000 23,000,000 21,000,000 23,000,000 24,000,000 24,000,000 24,000,000 Actual cash outlay to A-Rod 18,000,000 19,000,000 20,000,000 20,000,000 23,000,000 21,000,000 23,000,000 24,000,000 24,000,000 24,000,000 Incremental salary 15,000,000 15,505,000 15,928,325 15,256,499 17,473,821 14,562,001 15,499,732 15,262,187 13,820,448 12,140,822

Variable costs (incremental revenue) 0 0 0 0 0 0 0 0 0 0 Contract insurance 2,000,000 1,950,500 1,892,833 1,825,650 2,147,382 1,856,200 1,949,973 1,826,219 1,682,045 1,514,082 Taxes -3,404,260 -3,467,609 -3,490,861 -3,067,942 -3,951,791 -2,534,207 -2,805,650 -2,515,033 -1,729,456 53,050,218 Total costs 13,595,740 13,987,891 14,330,296 14,014,207 15,669,412 13,883,995 14,644,054 14,573,373 13,773,037 66,705,123

Net benefits -5,106,390 -5,201,414 -5,236,292 -4,601,913 -5,927,687 -3,801,310 -4,208,476 -3,772,549 -2,594,184 79,575,328 Discount factor 0.93 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50 0.46Discounted net benefits -4,728,139 -4,459,374 -4,156,738 -3,382,543 -4,034,284 -2,395,470 -2,455,605 -2,038,191 -1,297,738 36,858,774

Net present value(1,327,258

)

DCF Analysis of Rodriguez SigningDCF Analysis of Rodriguez Signing2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Incremental benefits

Incremental attendanceALCS incremental revenueWorld Series incremental revenueTicket salesParking/concessionsMerchandiseBroadcast revenueSponsorshipsRevenue lost to revenue sharingIncrease in franchise value Total benefits

Incremental expenses

Salary for replacement shortshop

Salary plus signing bonusCash outlay (ex deferred interest) 5,000,000 4,000,000 3,000,000 3,000,000 4,000,000 4,000,000 4,000,000 3,000,000 3,000,000 3,000,000 Actual cash outlay to A-Rod 6,719,582 5,375,680 4,031,760 4,031,760 5,375,680 5,375,680 5,375,680 4,031,760 4,031,760 4,031,760 Incremental salary 6,719,582 5,375,680 4,031,760 4,031,760 5,375,680 5,375,680 5,375,680 4,031,760 4,031,760 4,031,760

Variable costs (incremental revenue) 0 0 0 0 0 0 0 0 0 0 Contract insuranceTaxes -2,687,833 -2,150,272 -1,612,704 -1,612,704 -2,150,272 -2,150,272 -2,150,272 -1,612,704 -1,612,704 -1,612,704 Total costs 4,031,749 3,225,408 2,419,056 2,419,056 3,225,408 3,225,408 3,225,408 2,419,056 2,419,056 2,419,056

Net benefits -4,031,749 -3,225,408 -2,419,056 -2,419,056 -3,225,408 -3,225,408 -3,225,408 -2,419,056 -2,419,056 -2,419,056Discount factor 0.43 0.40 0.37 0.34 0.32 0.29 0.27 0.25 0.23 0.21Discounted net benefits -1,729,148 -1,280,854 -889,482 -823,594 -1,016,783 -941,466 -871,728 -605,366 -560,524 -519,004

What Happened NextWhat Happened Next

December 2000: signs record $252 million, 10-year December 2000: signs record $252 million, 10-year contract with Texas Rangerscontract with Texas RangersTom Hicks, Rangers owner: “Alex is the player we believe Tom Hicks, Rangers owner: “Alex is the player we believe will allow this franchise to fulfill its dream of continuing on will allow this franchise to fulfill its dream of continuing on its path to becoming a World Series champion.”its path to becoming a World Series champion.”Alex Rodriguez: “Hopefully when it is over, they won’t be Alex Rodriguez: “Hopefully when it is over, they won’t be calling Mr. Hicks a fool, but the wisest man in baseball. But calling Mr. Hicks a fool, but the wisest man in baseball. But only time will tell.”only time will tell.”For 2003 season, Rodriguez wins American League Most For 2003 season, Rodriguez wins American League Most Valuable Player; the Rangers finish the season with Valuable Player; the Rangers finish the season with win/loss ratio of 0.78 – identical to its 2000 finishwin/loss ratio of 0.78 – identical to its 2000 finish

EventsEvents

February 2004: Rangers trade Rodriguez to New York February 2004: Rangers trade Rodriguez to New York Yankees and agree to pay $67 million of the $179 million Yankees and agree to pay $67 million of the $179 million remaining on his original contractremaining on his original contractRodriguez wins 2005 American League MVP awardRodriguez wins 2005 American League MVP awardSeptember 2006: September 2006: Sports IllustratedSports Illustrated publishes cover story publishes cover story entitled, “The Lonely Yankee,” which highlights entitled, “The Lonely Yankee,” which highlights Rodriguez’s failure to win acceptance with the media, Rodriguez’s failure to win acceptance with the media, Yankee fans, and his own teammatesYankee fans, and his own teammatesUnidentified Yankee teammate: “It was always about the Unidentified Yankee teammate: “It was always about the numbers in Seattle and Texas for him. Winning is all you’re numbers in Seattle and Texas for him. Winning is all you’re judged on here.”judged on here.”

.316

.318

.300

.298

.286

.321

.290

Batting Batting averageaverage

Source:Baseball Almanac

20002000

20012001

20022002

20032003

20042004

20052005

20062006

132

135

142

118

106

130

121

RBIRBI

41

52

57

47

36

48

35

Home Home runsruns

15

18

9

17

28

21

15

Stolen Stolen basesbases Milestones/awardsMilestones/awards

Mariners lose ALCS Mariners lose ALCS to Yankeesto Yankees

A-Rod Offensive StatisticsA-Rod Offensive Statistics

Signs with Texas Signs with Texas RangersRangers

AL Gold Glove – AL Gold Glove – shortstopshortstop

AL Gold Glove – AL Gold Glove – shortstop; AL MVPshortstop; AL MVP

AL Silver Slugger;AL Silver Slugger;AL MVPAL MVP

Signs with New York Signs with New York YankeesYankees

Team Standings by YearTeam Standings by Year

Mariners Rangers Yankees

Year Wins LossesW/L ratio Wins Losses

W/L ratio Wins Losses

W/L ratio

1995 79 66 1.20 74 70 1.06 79 65 1.22

1996 85 76 1.12 90 72 1.25 92 70 1.31

1997 90 72 1.25 77 85 0.91 96 66 1.45

1998 76 85 0.89 88 74 1.19 114 48 2.38

1999 79 83 0.95 95 67 1.42 98 64 1.53

2000 91 71 1.28 71 91 0.78 87 74 1.18

2001 116 46 2.52 73 89 0.82 95 65 1.46

2002 93 69 1.35 72 90 0.80 103 58 1.78

2003 93 69 1.35 71 91 0.78 101 61 1.66

2004 63 99 0.64 89 73 1.22 101 61 1.66

2005 69 93 0.74 79 83 0.95 95 67 1.42

2006 78 84 0.93 80 82 0.98 97 65 1.49

0

20

40

60

80

100

120

140

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

20

40

60

80

100

120

140

160

180

200

Attendance and Wins by TeamAttendance and Wins by Team

WinsWinsAttendance Attendance

IndexedIndexed

Source:ESPN, Baseball Almanac

MarinersMarinersRangersRangersYankeesYankees

MarinersMarinersRangersRangersYankeesYankees

Key TakeawaysKey Takeaways

Financial concepts are applicable to a wide Financial concepts are applicable to a wide range of situations – not just to standard range of situations – not just to standard corporate financial decision makingcorporate financial decision making

Finance is a fundamental tool in problem Finance is a fundamental tool in problem solving: it forces logic and ensures analytical solving: it forces logic and ensures analytical rigor and completenessrigor and completeness

Classic financial skills can be brought to bear Classic financial skills can be brought to bear in assessing, building, and managing personal in assessing, building, and managing personal value/wealth creationvalue/wealth creation

Today’s DiscussionToday’s Discussion

Case study: Case study: A-Rod – Signing the A-Rod – Signing the Best Player in BaseballBest Player in Baseball

My career in finance: a perspectiveMy career in finance: a perspective

My StoryMy Story

OperationalOperationalFinancialFinancialDeal executionDeal executionComplex business problem solvingComplex business problem solvingManagerialManagerial

Aimed to create distinctive skill setAimed to create distinctive skill set

My storyMy story

U.S.U.S.U.K.U.K.FranceFrance

Supplemented with international Supplemented with international experienceexperience

International businessInternational businessFinanceFinanceGovernmentGovernmentPhilanthropyPhilanthropy

Worked hard to establish and Worked hard to establish and cultivate broad professional networkcultivate broad professional network

Hard workingHard workingEnergeticEnergetic

Established track record/ reputationEstablished track record/ reputation

Focused initially on establishing Focused initially on establishing credibility through academicscredibility through academics

CommentsComments

A seemingly A seemingly incremental, logical incremental, logical progression; but in progression; but in reality a narrative reality a narrative filled with twists, filled with twists, turns, and turns, and ultimately self-ultimately self-discoverydiscovery

Personal renewal/ Personal renewal/ reinvention entails reinvention entails experimentation, experimentation, learning, adapting – learning, adapting – and a willingness to and a willingness to put oneself at riskput oneself at risk

Coherence does Coherence does emerge: our emerge: our present is related to present is related to the past, and from the past, and from that trajectory, we that trajectory, we are able to glimpse are able to glimpse our futureour future

Allstate Insurance Allstate Insurance CompanyCompany

Deutsche BankDeutsche Bank

Bankers TrustBankers Trust

McKinsey & CompanyMcKinsey & Company

Goldman SachsGoldman Sachs

ExperiencesExperiences

My resumeMy resume

Harvard Business SchoolHarvard Business School

Oxford UniversityOxford University

Middlebury CollegeMiddlebury College

Tulane UniversityTulane University

EducationEducation

Selected Career ExperiencesSelected Career Experiences

FirmFirm Selected projectsSelected projects

Goldman SachsGoldman Sachs • Conducted initial public offering of Tiffany & Conducted initial public offering of Tiffany & CompanyCompany

• Completed trading floor rotation in Debt Capital Completed trading floor rotation in Debt Capital marketsmarkets

• Brought secondary common stock offering to Brought secondary common stock offering to market for Chili’s, Inc.market for Chili’s, Inc.

McKinsey & McKinsey & CompanyCompany

• Launched first-ever electricity trading business Launched first-ever electricity trading business for Enron Corp.for Enron Corp.

• Assessed worldwide power plant development Assessed worldwide power plant development opportunities for EDF, France’s state-owned opportunities for EDF, France’s state-owned electric utilityelectric utility

Bankers Trust/ Bankers Trust/ Deutsche BankDeutsche Bank

• Served as Chief of Staff for Chairman and CEOServed as Chief of Staff for Chairman and CEO• Member of senior team that accomplished sale Member of senior team that accomplished sale

of Bankers Trust to Deutsche Bankof Bankers Trust to Deutsche Bank• Worked as London-based mergers and Worked as London-based mergers and

acquisitions specialistacquisitions specialist

Allstate Allstate Insurance Insurance CompanyCompany

• Led teams responsible for pricing, product, and Led teams responsible for pricing, product, and underwriting decisions for Eastern half of the underwriting decisions for Eastern half of the U.s.U.s.

• Involved in numerous strategic evaluations and Involved in numerous strategic evaluations and initiativesinitiatives

Overview of Professional DevelopmentOverview of Professional Development

PrerequisitesPrerequisites

Business/technical problem solvingBusiness/technical problem solvingConceptual powerConceptual powerBusiness judgmentBusiness judgmentProductivity/quality controlProductivity/quality control

People leadershipPeople leadershipInterpersonal relationsInterpersonal relationsCommunications effectivenessCommunications effectiveness

Basic skillsBasic skillsPartnerlike behaviorPartnerlike behaviorDevelopment/caring for Development/caring for peoplepeopleInspirational to othersInspirational to othersIs enjoyable to work withIs enjoyable to work with

Personal impactPersonal impactReinforces professional valuesReinforces professional valuesDoes what is rightDoes what is right

Adherence to professional valuesAdherence to professional values

PerformancePerformance

Performance impactPerformance impactIntellectual contributions/thought leadershipIntellectual contributions/thought leadershipPeople development/followershipPeople development/followership

Demonstrated impactDemonstrated impact

Future leadership roleFuture leadership role

Business/general managementTechnical/functional expertisePeople leadership

Leadership potential

A Few Parting WordsA Few Parting Words

Heroism: follow the examples of recognized heroesHeroism: follow the examples of recognized heroesCareer is, ultimately, a journey/quest of self-knowledge Career is, ultimately, a journey/quest of self-knowledge and understandingand understandingIntense sense of commonality/kinshipIntense sense of commonality/kinship

Key themesKey themes ”“We have not even to risk the adventure alone, for We have not even to risk the adventure alone, for

the heroes of all time have gone before us. The the heroes of all time have gone before us. The labyrinth is thoroughly known. We have only to labyrinth is thoroughly known. We have only to follow the thread of the hero path. And where we follow the thread of the hero path. And where we had thought to find an abomination, we shall find a had thought to find an abomination, we shall find a god. And where we had thought to slay another, god. And where we had thought to slay another, we shall slay ourselves. And where we had we shall slay ourselves. And where we had thought to travel outward, we shall come to the thought to travel outward, we shall come to the center of our own existence. And where we had center of our own existence. And where we had thought to be alone, we shall be with all the world.thought to be alone, we shall be with all the world.

Joseph CampbellJoseph Campbell