Crunching Numbers: The Financial Strategy Behind Shohei Ohtani's $700 Million Deal

Feliciano School of Business professors Todd Federman and David Axelrod from the Department of Economics discuss Los Angeles Dodgers pitcher Shohei Ohtani's $700 million contract. The contract covers 10 years of play but will be paid out over 20 years. They explain how the contract is beneficial to both Ohtani and the Los Angeles Dodgers through business concepts like present value, elasticity, inflation, and supply and demand.

Speaker Bios
Dr. Axelrod received his Ph.D. in Economics from Rutgers University in 1990, with the dissertation Three Essays on Latency in Economics and Decision Making. He has taught at Montclair State University as an adjunct professor since 2013. Previously, he worked in finance for twenty years as an economist, consultant and actuarial analyst, including positions with Falcon Management, Volvo Finance, and Crum & Forster. He has also produced research in health economics, and the nature of choice and well-being. Dr. Axelrod provides holonomic consultation and workshops. He plays electric bass, and has released over a dozen albums of original music.

After getting an MBA from Harvard, Todd Federman started his twenty-five year Wall Street career at Goldman Sachs as a bond trader. He then joined Drexel Burnham as both a bond and equity trader. After Drexel, Todd spent fifteen years at hedge fund Paloma Partners, managing a regional office and trading equities based on a proprietary technical trading model. After leaving Wall Street, he started a second career in education. Todd was an adjunct in the Mathematics department at MSU from 2009-2014 before joining the Economics department full time in the fall of 2014. Todd was also an independent Education Consultant. He ran professional development workshops, focused on showing teachers how to use Smart Boards effectively.

Transcript

Speaker 1: 0:00

My name is Todd Fetterman and I'm David Axrod. We both teach economics here at the Feliciano School of Business At Montclair State University. You may have heard about Shohei Ohtani, the great baseball player. Some people think he's the best baseball player since Babe Ruth. He just signed a contract over the winter. For how much? $700 million. But it's a lot more complicated than that. It's a 10-year contract, but you see numbers here going to 20 years. It covers 10 years of play, but he's going to get paid over a 20-year time period. He's only going to get $2 million a year for the first 10 years and then $68 million starting in year 11. For 10 years it totals to $700, but a dollar paid 20 years from now is not worth the same as today. We do something called a present value calculation, where we take the amount that's going to get paid divided by 1 plus the interest rate raised to the nth power. Major League Baseball uses an interest rate of 4.43%, so the money that's going to get paid in the future has less present value today. 68 million paid in year 11 is only worth 42 million today because it gets reduced by the present value calculation. Adding up the present value, we end up with a total present value today of about 366 million.

Speaker 1: 1:21

Ohtani wants to know that the money's going to really be there. He's not going to just trust the Dodgers. So they have to put the money away in something called an escrow account, probably with an insurance company. They're required by the contract to put away 43 million for 10 years. We now have a future value calculation where we take the amount and we raise it by the interest rate raised to the number of years. So $43 million is going to have a future value of $66 million when you raise it to the interest rate for 10 years. Each year the $43 million is going to grow. The escrow is going to grow to about $550 million and then they're going to start paying him $68 million out of that pile, start paying him $68 million out of that pile. We add interest to the balance, take away $68, so the number's going to dwindle to essentially zero at the end of year 20. So, david, why does this make sense for Otani?

Speaker 2: 2:13

Well, it may make sense for Otani for a couple of reasons. One, this gives the Dodgers more money to hire other excellent ballplayers, because Otani wants the money. But he also wants to win championships, and probably not just one.

Speaker 1: 2:30

Right. Does it make sense for the Dodgers to do this? Well, they're going to spend $2 million plus 43 a year $45 million Right now. If they sell an extra 2,000 tickets because he's a big attraction and the people spent $250 between the ticket and the merchandise, that's $500,000. A game times, 80 games, that's $40 million right there. In addition, we teach the concept of elasticity, which means when you raise prices, do people buy the same quantity? They can probably charge higher prices to everybody, not just the additional seats. They're going to charge higher prices to everybody, not just the additional seats they're going to sell. Well, there's inflation.

Speaker 2: 3:09

From the standpoint of the Dodgers, they're paying two plus 43 in each of these years, so 45 million. Well, you know you're not going to buy as much in 10 years, so that's actually an even better deal for the Dodgers. It's a much better deal for the Dodgers.

Speaker 1: 3:25

It's a much better deal for the Dodgers. The price that they can charge for tickets 10 years from now will be substantially higher. They still owe him only $45 million in payments.

Speaker 1: 3:33

So the Dodgers like it, Otani, if it's going to help him get some championships he likes it and we're not worried about him only getting $2 million a year, because it's estimated he could make as much as $50 million a year in endorsements. And 10 years from now, when he starts getting these $68 million a year payments, he's probably going to move to a state that doesn't have a state income tax, or he might move back to Japan, where this may get taxed at a very low level. So everybody likes the deal. It's almost opening day Play ball.