Practical Applications ofCorporate FinancePresentation to Finance 321University of Illinois at Urbana-ChampaignMarch 27, 2007

Todays DiscussionCase study: A-Rod Signing the Best Player in BaseballMy career in finance: a perspective

Todays DiscussionCase study: A-Rod Signing the Best Player in BaseballMy career in finance: a perspective

Assessing ValueIs this 25-year-old baseball player worth one quarter of a billion dollars?Key themesKey issueWhat are the incremental benefits that will accrue to the Rangers over the life of the contract and beyond?What characteristics does this asset possess that make it attractive?Uniqueness/rarityComplementarityAppropriabilityLife-cycle value creationWhat can be done during the ownership/disposal phases to enhance the value of this asset?What are the key risks in buying this asset and how can they be mitigated?Key considerations

Home runsBase hitsStrike outs/walksAt bats 100% =Source:Baseball AlmanacHank Aaron12,364Barry Bonds9,507Ty Cobb11,434Lou Gehrig8,001Ken Griffey8,298Ricky Henderson10,961Willie Mays10,881Babe Ruth8,399Alex Rodriguez2,930Record Offensive StatisticsAverageHighAverageHighAverageHigh.355.370.420.374.327.327.347.393.358.305.299.366.340.291.279.302.342.31413212912718414674141163132100928111789458710111531529617241304017461024376105615625BattingRBIStolen bases23212417182522225Career (years)

On-Base and Slugging Statistics

On-base percentageSlugging averageAverageHighAverageHighTed Williams.482.553Babe Ruth.690.847Babe Ruth.474.545Ted Williams.634.901Lou Gehrig.447.538Lou Gehrig.632.769Barry Bonds.443.609Barry Bonds.608.863Ty Cobb.433.468Alex Rodriguez.576.631Ricky Henderson.401.469Ken Griffey.557.674Willie Mays.384.425Willie Mays.557.667Alex Rodriguez.380.420Hank Aaron.555.669Hank Aaron.374.410Ty Cobb.512.621Ken Griffey.374.408Ricky Henderson.419.577

Analytical FrameworkSpaces/ purchasesAverage price$18.00TicketsAverage price$2.50Average price$1.80ItemsParking/concessions revenueIncremental revenue $10 millionMerchandise revenueTicket revenueProbability 7.0%Probability3.5%Incremental revenue$10 millionIncremental revenueFranchise multiple 3.0xGlamour factor$100 millionValue x++Live gate revenueSponsorships $1 millionWorld Series revenueBroadcast revenueALCS revenueRevenue lost to revenue sharing17.5%++++xx++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 winEight (8) additional wins

DCF Analysis of Rodriguez Signing

2001200220032004200520062007200820092010Incremental benefits

Incremental attendance360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000 360,000 ALCS incremental revenue700,000 724,500 749,858 776,103 803,266 831,380 860,479 890,595 921,766 954,028 World Series incremental revenue350,000 362,250 374,929 388,051 401,633 415,690 430,239 445,298 460,883 477,014 Ticket sales6,480,000 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/concessions900,000 931,500 964,103 997,846 1,032,771 1,068,918 1,106,330 1,145,051 1,185,128 1,226,608 Merchandise648,000 670,680 694,154 718,449 743,595 769,621 796,557 824,437 853,292 883,157 Broadcast revenue0 0 0 0 0 0 0 0 0 0 Sponsorships1,000,000 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 value134,710,338 Total benefits8,489,350 8,786,477 9,094,004 9,412,294 9,741,724 10,082,685 10,435,579 10,800,824 11,178,853 146,280,451

Incremental expenses

Salary for replacement shortshop3,000,000 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 bonus23,000,000 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-Rod18,000,000 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 salary15,000,000 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 insurance2,000,000 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-3,404,260-3,467,609-3,490,861-3,067,942-3,951,791-2,534,207-2,805,650-2,515,033-1,729,45653,050,218 Total costs13,595,740 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-5,106,390-5,201,414-5,236,292-4,601,913-5,927,687-3,801,310-4,208,476-3,772,549-2,594,18479,575,328 Discount factor0.93 0.860.790.740.680.630.580.540.500.46Discounted net benefits-4,728,139-4,459,374-4,156,738-3,382,543-4,034,284-2,395,470-2,455,605-2,038,191-1,297,73836,858,774 Net present value(1,327,258)

DCF Analysis of Rodriguez Signing

2011201220132014201520162017201820192020Incremental 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-Rod6,719,582 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 salary6,719,582 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 costs4,031,749 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 factor0.430.400.370.340.320.290.270.250.230.21Discounted 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 NextDecember 2000: signs record $252 million, 10-year contract with Texas RangersTom Hicks, Rangers owner: Alex is the player we believe will allow this franchise to fulfill its dream of continuing on its path to becoming a World Series champion.Alex Rodriguez: Hopefully when it is over, they wont be calling Mr. Hicks a fool, but the wisest man in baseball. But only time will tell.For 2003 season, Rodriguez wins American League Most Valuable Player; the Rangers finish the season with win/loss ratio of 0.78 identical to its 2000 finishEventsFebruary 2004: Rangers trade Rodriguez to New York Yankees and agree to pay $67 million of the $179 million remaining on his original contractRodriguez wins 2005 American League MVP awardSeptember 2006: Sports Illustrated publishes cover story entitled, The Lonely Yankee, which highlights Rodriguezs failure to win acceptance with the media, Yankee fans, and his own teammatesUnidentified Yankee teammate: It was always about the numbers in Seattle and Texas for him. Winning is all youre judged on here.

Batting averageSource:Baseball Almanac2000200120022003200420052006RBIHome runsStolen basesMilestones/awardsMariners lose ALCS to YankeesA-Rod Offensive StatisticsSigns with Texas RangersAL Gold Glove shortstopAL Gold Glove shortstop; AL MVPAL Silver Slugger; AL MVPSigns with New York Yankees

Team Standings by Year

MarinersRangersYankeesYearWinsLossesW/L ratioWinsLossesW/L ratioWinsLossesW/L ratio199579661.2074701.0679651.22199685761.1290721.2592701.31199790721.2577850.9196661.45199876850.8988741.19114482.38199979830.9595671.4298641.53200091711.2871910.7887741.182001116462.5273890.8295651.46200293691.3572900.80103581.78200393691.3571910.78101611.66200463990.6489731.22101611.66200569930.7479830.9595671.42200678840.9380820.9897651.49

Attendance and Wins by TeamWinsAttendance IndexedSource:ESPN, Baseball AlmanacMarinersRangersYankeesMarinersRangersYankees

Key TakeawaysFinancial concepts are applicable to a wide range of situations not just to standard corporate financial decision makingFinance is a fundamental tool in problem solving: it forces logic and ensures analytical rigor and completenessClassic financial skills can be brought to bear in assessing, building, and managing personal value/wealth creation

Todays DiscussionCase study: A-Rod Signing the Best Player in BaseballMy career in finance: a perspective

My Story

Selected Career Experiences

FirmSelected projectsGoldman SachsConducted initial public offering of Tiffany & CompanyCompleted trading floor rotation in Debt Capital marketsBrought secondary common stock offering to market for Chilis, Inc.McKinsey & CompanyLaunched first-ever electricity trading business for Enron Corp.Assessed worldwide power plant development opportunities for EDF, Frances state-owned electric utilityBankers Trust/ Deutsche BankServed as Chief of Staff for Chairman and CEOMember of senior team that accomplished sale of Bankers Trust to Deutsche BankWorked as London-based mergers and acquisitions specialistAllstate Insurance CompanyLed teams responsible for pricing, product, and underwriting decisions for Eastern half of the U.s.Involved in numerous strategic evaluations and initiatives

Overview of Professional Development

A Few Parting WordsHeroism: follow the examples of recognized heroesCareer is, ultimately, a journey/quest of self-knowledge and understandingIntense sense of commonality/kinshipKey themes

* 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.** 2005 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.*