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.

Episode Transcript

Speaker 1 (00:00):
My name is Todd Fetterman and I'm David Axrod.
We both teach economics here atthe Feliciano School of
Business At Montclair StateUniversity.
You may have heard about ShoheiOhtani, the great baseball
player.
Some people think he's the bestbaseball player since Babe Ruth
.
He just signed a contract overthe winter.
For how much?
$700 million.
But it's a lot more complicatedthan that.
It's a 10-year contract, butyou see numbers here going to 20

(00:23):
years.
It covers 10 years of play, buthe's going to get paid over a
20-year time period.
He's only going to get $2million a year for the first 10
years and then $68 millionstarting in year 11.
For 10 years it totals to $700,but a dollar paid 20 years from
now is not worth the same astoday.

(00:44):
We do something called apresent value calculation, where
we take the amount that's goingto get paid divided by 1 plus
the interest rate raised to thenth power.
Major League Baseball uses aninterest rate of 4.43%, so the
money that's going to get paidin the future has less present
value today.
68 million paid in year 11 isonly worth 42 million today

(01:09):
because it gets reduced by thepresent value calculation.
Adding up the present value, weend up with a total present
value today of about 366 million.
Ohtani wants to know that themoney's going to really be there
.
He's not going to just trustthe Dodgers.
So they have to put the moneyaway in something called an

(01:29):
escrow account, probably with aninsurance company.
They're required by thecontract to put away 43 million
for 10 years.
We now have a future valuecalculation where we take the
amount and we raise it by theinterest rate raised to the
number of years.
So $43 million is going to havea future value of $66 million
when you raise it to theinterest rate for 10 years.

(01:52):
Each year the $43 million isgoing to grow.
The escrow is going to grow toabout $550 million and then
they're going to start payinghim $68 million out of that pile
, start paying him $68 millionout of that pile.
We add interest to the balance,take away $68, so the number's
going to dwindle to essentiallyzero at the end of year 20.
So, david, why does this makesense for Otani?

Speaker 2 (02:13):
Well, it may make sense for Otani for a couple of
reasons.
One, this gives the Dodgersmore money to hire other
excellent ballplayers, becauseOtani wants the money.
But he also wants to winchampionships, and probably not
just one.

Speaker 1 (02:30):
Right.
Does it make sense for theDodgers to do this?
Well, they're going to spend $2million plus 43 a year $45
million Right now.
If they sell an extra 2,000tickets because he's a big
attraction and the people spent$250 between the ticket and the
merchandise, that's $500,000.

(02:50):
A game times, 80 games, that's$40 million right there.
In addition, we teach theconcept of elasticity, which
means when you raise prices, dopeople buy the same quantity?
They can probably charge higherprices to everybody, not just
the additional seats.
They're going to charge higherprices to everybody, not just
the additional seats they'regoing to sell.
Well, there's inflation.

Speaker 2 (03:09):
From the standpoint of the Dodgers, they're paying
two plus 43 in each of theseyears, so 45 million.
Well, you know you're not goingto buy as much in 10 years, so
that's actually an even betterdeal for the Dodgers.
It's a much better deal for theDodgers.

Speaker 1 (03:25):
It's a much better deal for the Dodgers.
The price that they can chargefor tickets 10 years from now
will be substantially higher.
They still owe him only $45million in payments.
So the Dodgers like it, Otani,if it's going to help him get
some championships he likes itand we're not worried about him
only getting $2 million a year,because it's estimated he could
make as much as $50 million ayear in endorsements.

(03:47):
And 10 years from now, when hestarts getting these $68 million
a year payments, he's probablygoing 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 avery low level.
So everybody likes the deal.
It's almost opening day Playball.