Thinking Of Yu

As it currently stands, teams have until 5:00 PM ET on December 14th to make a bid for Japanese pitching phenom Yu Darvish. In the lead up to MLB’s announcement as to who wins the exclusive rights to negotiate a contract with Darvish, we’re bound to hear nonsense rumours about leading candidates to land the potential star.

For the record, it’s rather difficult to be a leading candidate when sealed bids are involved.

There were some suggestions made over the weekend by a certain blogger over at a certain website that the Toronto Blue Jays might be more interested in acquiring a player like Darvish because the terms of his contract, after the payment of a large posting fee, would make him easier to eventually trade than a typical free agent.

With so much of the money earmarked for Darvish siphoned off by his Japanese club, the team who wins the bidding will get him on a much more favourable contract than if all the money the club was willing to spend on him went directly to the player. He’s much less an unmovable asset because of it.

At first glance, this type of justification for acquiring Darvish seems like the exact type of strategy that Blue Jays General Manager Alex Anthopoulos might employ. Fans of the team can likely recount several occurrences in which the GM showed a preference for options, not just the club ones included in contracts, but also acquisitions that allow for the most flexible roster, both now and in the future.

However, does Darvish really represent a more fluid acquisition over other free agents?

I don’t see how.

Too much analysis on Darvish underplays or outright eliminates the posting fee from the equation. That’s simply not an accurate way of looking at any deal involving the pitcher. In measuring cost to value, the posting fee has to be considered as part of the contract because it’s quite literally part of the cost of acquiring Darvish.

Several times over the winter meetings, we compared long-term contracts with mortgages. A well-planned, long-term contract will underpay for the player’s value in the beginning of the deal and overpay for his value in the end. Similarly, at the beginning of a mortgage, the payments mostly cover interest, but as it nears the end, most of the equity gets paid off.

Therefore, we can’t say that such-and-such signing is good now, but it’s going to be bad later. This is what a club agreeing to a long-term deal is expecting. Just as any businessman is aware of the depreciation of the assets he or she is purchasing, front offices are just as aware of the expected declines in players that they’re acquiring.

Given his age and the enormity of the up front posting fee, the mortgage metaphor doesn’t quite work the same way with Darvish. However, claiming that the theoretical lower cost to his contract will make him easier to trade down the line is to totally ignore where the value of a potential Darvish deal is found or, if there is a perceived lack of value to be found, the current practice of sharing the cost of contracts at the back end with trading partners.

The team that signs him to his first Major League contract will still view his deal in terms that include the entirety of it. Because they paid for so much of that value up front, selling on it at the point in which it offers returns on the initial investment would be incredibly foolish.

For argument’s sake though, let’s say that the Darvish deal isn’t working out, and the team that originally acquired him wants to cut bait. How is cutting bait on the entirety of what’s already been invested preferable to working out an agreement in which you share the cost of the remaining years of a contract with a trading partner over time?

It’s not.

As much as we can all fall in love with a guy who does the things that we see in this video:

There is no way of getting around the fact that a deal for Yu Darvish is a financial risk without an easy method of extraction.

Comments (28)

  1. The weird thing about Darvish is that I think I’d prefer spending $100 million him over spending $75 million or whatever on a guy like CJ Wilson, almost exclusively because I know less about Darvish (and obviously because it’s not my money). The mystery is what makes him exciting… we know exactly what Wilson is, and while the fact that Darvish has never faced MLB hitters should be a reason to be wary, my brain is using it as reason to imagine how great he might be.

  2. If he’s an elite pitcher, he is worth it. If he is just a decent or avg pitcher, he isn’t worth it. it is completely a scouting question. One of the hardest things to acquire is young and elite starting pitchers. That makes it at least worth considering.

    The X factor is if rogers sees this as some sort of marketing opportunity. If they see the posting fee as separate from the annual operating budget it really changes the equation.

    what seems like a worse gamble 100M$ for darvish or 180M$ for fielder? I’m not sure.

    • Even an elite pitcher has a limit to what he’s worth. And that’s the question. How much is too much for Yu?

      • for sure everyone has a price. If the marlins offer a 100M$ posting fee the jays should gracefully (or not) back out.

        Looking at the market these days it doesn’t seem unreasonable to pay 90-120M$ for prime years of a potentially elite pitcher.

        CJ wilson got 78M$ for the extra 20 or 30M$ i’ll take the upside of darvish.

        it is never going to not be a gamble. signing halladay is not gamble but that’s about it.

        • If the Marlins offer a $100 million posting fee, the Jays won’t know about it until the winning bid is announced. At that point the Jays won’t have a choice to back out or not, they will be out.

  3. This is totally right. It’s true that the posting fee will probably make Darvish easier to trade down the road, but only in a way that ties your own hands. If we pay $50 million for him now, three years from now, he’ll be easier to trade than a domestic free agent we pay $50 million for…because the posting fee is the equivalent of promising to eat that portion of the contract. He’s certainly no easier to trade than the domestic free agent at $50 million if you make it apples-to-apples and are willing to eat a portion of that FA’s contract that’s equivalent to Darvish’s posting fee.

    Worse than that, actually, since it’s all money you pay up front, so it’s worth more than the future money you’d be eating.w/r/t the other free agent. Anyway, all I’m saying is that while you can argue it’s technically true that Darvish would be easier to trade in the future, that’s not at all a benefit to the team, and I really doubt AA sees it that way.

  4. Definitely the cost of the posting process will be considered part of the overall cost for any team looking to acquire Darvish. The team would have to be stupid to not consider this.

    But if the deal goes bad… and I mean really bad. Having the up front posting fee does make the deal easier to move.

    If the Sox paid Adam Dunn a $25 million posting fee and then spread the rest of his contract over the next four years, do you think they would be hanging onto him for now? Maybe, to try and recoup some of their up front money. But maybe not if they felt the value wasn’t there for the next 3 years at a still very significant investment.

    Either way, it would create significantly more flexibility as more teams would be willing to take the contract if the Sox wanted to wash their hands of it.

    Same goes for Darvish. You definitely need to look at both posting fee and contract value when determining if this is a financial risk your club wants to take.

    But lets face it. If you’re looking to get out of the contract in a couple years, then basically everything has already hit the fan. In this case, you have a better chance of recouping some of the value with a contract like the one Darvish will be getting as compared to a basic FA contract. This makes it slightly lower risk and definitely gives you more flexibility… which AA loves.

    • You might be right, but that just means the team is kind of stupid. If you look at the potential of trading Dunn and agreeing to pay $25 million of his contract going forward as somehow different than giving him a $25 million posting fee, you’re just not looking at it rationally (which teams don’t always do).

    • And please stop comparing contracts to mortgages. if teams really look at it this way, then they have things all wrong. They should instead be compared to car loans.

      Houses are assets that maintain and grow their value over time. Cars and baseball players are now.

      The depreciating value of a baseball players WAR over time is similar to the way a car depreciates in value. Especially with FA contracts. If you pay more than any other team is willing to for a FA, that player and their attached contract isn’t valuable to any other team. The equivalent of your new car losing value the minute you drive it off the lot.

      Whether team view contracts at amortized mortgages or not, it’s really not an accurate way to judge things…. unless a 41 year old Pujols will be worth as much or more as the 31 year old with the $254 million contract.

      • That misses the point. We all know players old enough to have reached free agency figure to depreciate in value. In an ideal (to the team) world, every player, after the six-year indentured servitude period, would get a one-year contract every year at or below the anticipated value for his services that season.

        Since the players have rights and a union and stuff making that impossible, though, and you have to offer multi-year deals and a certain amount of money in order to have any chance at all, the goal should absolutely be to underpay now and overpay later. Hell, if the league didn’t have salary caps and stuff and Albert would agree to this, the team’s ideal yearly setup, having already agreed to pay $254 million, would be something like $1/1/1/1/1/1/1/1/1/$253,999,991.

      • Yep. Car loans are probably a better metaphor. Thanks.

    • But that flexibility already exists to teams. All they have to do is be willing to eat some of the contract. I don’t see how it’s at all different other than the team gets to do it over time as opposed to lump summing it from the beginning.

      • Good point.

        Hmmmmmm……

        I’m sure Rogers wouldn’t completely forget about the posting fee when calculating their future “payroll parameters”. They would certainly pro-rate the posting fee over the life of the contract for purposes of figuring this out.

        Definitely re-thinking my position on this one.

  5. I think the first yr of the contract will definitely be worth the investment because the league will not be familiar with him. He could have a great yr simply because hitters dont know him. After that, who knows. However, from everything I’ve read it seems he’s much more aggressive than dice-k and has better stuff.

  6. Not*

    Sorry for the typo

  7. 2 things. First of all, think all the time saved when everyone who needs to write a snazzy headline about the Jays every 5 days will have a much much easier time with “Yu Darvish” than, say “Brett Cecil”. Not to knock Cecil, but, I mean, gee – we could be talking about millions of nano-seconds and brain cells saved here.

    Secondly, did you consider the inverse of your point? Take off the doom-and-gloom hat for a moment and wonder if Yu could actually be worth the big posting fee and modest contract. Then consider the lucky team’s position when they have a premier pitcher at a contract that’s affordable to any club. What’s the difference between this and, say, going overslot at the draft table or throwing millions at Cuban Shortstops?

    • The most spent in posting has been $51 million. The most spent in draft bonuses is what, $7 million? What was the Chapman bonus? $15 mmillion? Neither compare to what Darvish will cost in total.

      I’m not writing about whether or not Darvish is worth it. It’s about getting rid of his contract at a later date.

  8. I agree with the earlier poster who suggested you stop employing the mortgage metaphor. It demonstrates a lack of financial understanding and detracts from your overall point. Mortgages do not represent an underpay/overpay scenario, as you describe the ‘ideal’ contract.

    I’m also unsure as to how you have determined that the ideal contract structure should feature this underpay-overpay approach. Bill’s 1/1/1/1/253… example is particularly befuddling. This is a really interesting point and I’d like to see it explored further – but please spare us the mortgage analogy!

    • It’s basically the “time value of money” concept. As a general matter, money is worth more today than it is tomorrow, in that if you gave me $1,000,000 today, I could turn around and put it in some sort of interest-bearing account and have like a dollar more than I would if you gave me the same million tomorrow (numbers obviously totally made up, but you get the idea).

      So once you’ve decided you’re going to pay Albert Pujols $254 million, it’s in the team’s best interest to pay him as little of that as possible until the last possible moment. If you want to keep it simple for budgeting purposes, take $25 million in cash out in expenses each year, pay Pujols his $1, and invest the remainder. Then after ten years, pay Pujols his $253,999,991 out of the investment account, after which you’ll still have millions of dollars left over — millions you wouldn’t have made if you’d had to pay Pujols earlier.

      That’s obviously a ridiculous example, but helps to explain why teams don’t want to front-load contracts. You’re paying him $25 million in year one when (you hope) he’s worth $40 million, and then by the end of it, you’re still paying him $25 million when maybe he’s worth almost nothing. It seems wrong to the fans, who would rather see him get paid what they think he’s worth each year…but if a team structures a contract to try to do that (which they do, sometimes), they’re just throwing money away.

      • This explanation is a massive plus one.

      • This is a very reasonable explanation but it leaves out the elements of cashflow and budgeting. I suppose the team could pay in on a balanced-budget basis, and pay out back-loaded – that would be pretty sharp. However, there is also financial risk to consider in that scenario.

        While the NPV argument makes sense in a vacuum, in the real-world a team is more likely to look at a couple other factors in addition to the time-value of money.

  9. After some reflection I don’t think that it is entirely accurate to say that “the posting fee has to be considered as part of the contract…” when comparing Darvish’s contract to the contracts of comparable players available via free agency.

    The fact is that Darvish is not a free agent. He is the property of another team. The posting system is in essence a system whereby MLB teams can trade for the rights of NPB players in exchange for cash.

    If an MLB team were to trade for a similarly talented, controllable, MLB-ready player from another MLB (assuming t hat one was available in a trade), it would obviously cost a significant amount in terms of prospects and other assets, which could very well deplete the farm system of the acquiring team.

    The value of those prospects which are traded is the acquisition cost.. While that acquisition cost factors in to the decision of whether or not a trade is of sufficient value to the acquiring team, it is not usually considered as part of player’s contract for the purposes of evaluating whether that contract represents good value vis-a-vis other MLB players.

    the fact is th

    • Sorry about the typos …

    • I would say though that there should be a financial analysis for any transaction that’s made, regardless of whether it’s assets or cash that you’re giving up. That’s one area that AA has excelled in: trading for favourable contracts. In the Darvish example, it’s unlike anything else because he comes without a contract.

      • Darvish comes without a contract, but he is controllable in the sense that he is not free to negotiate with any other team. That in itself limits his leverage and makes it more likely that the team can sign him on favourable terms. The exclusive negotiating rights and the consequent ability to ability to sign him to a favourable contract is what MLB teams are paying for with the posting fee, just the same as a team trading for an MLB player would pay more in terms of prospects in order to acquire a star MLB player under control with a favourable contract.

        Darvish’s only leverage is that he can refuse to sign a deal with the MLB club and stay in Japan until his contract expires (where he will most certainly get paid less than whatever contract is being offered by the MLB club)… but even in that case, the MLB team doesn’t have to pay the posting fee, so the trade is essentially voided and there is no harm done

  10. The reality is a team, like any well-managed business, cares primarily about the present value of a contract. That is the contract’s total discounted value (the value of the contract is adjusted using a discount rate, typically the discount rate reflects some average return proxy e.g. the return on 10-year government bonds).

    Timing of payments only matters because people typically value receiving money sooner (since those funds can be reinvested and there is less inherent risk); for example, a back-loaded contract for the total same dollar value will have a lower present value than an equivalent front-loaded contract.

    All else being equal, the posting fee is arguably more expensive, in relative terms, since the lump sum posting payment is made-up front.

    The player is only more “tradable” from the stand point that the club has already paid a large portion of his contract in advance. For example, the same club, which did not pay a positing fee, could alternatively make a player more tradable by simply paying the team which is looking to acquire the contract a large sum (e.g. the original team eats a portion of the players contract).

    The two advantages to the positing system I can see have nothing to do with contract structuring. They are as follows

    1. From what I understand, the posting fee does not count for the purposes of calculating luxury tax, so it could be a lucrative option for teams like the Yankees who will be up against the cap in the future; and

    2. A portion of the positing fee will be netted out, since the team receiving the player should obtain additional revenue from the Asian market.

    Everything else is just contract structuring. The real issue is present value.

    • Well said. That additional revenue from Asian market is far more limited then people think. Merchandise and TV sales go to MLB, not individual teams. Only way money is made is through specific corporate sponsorship, which baseball teams generally speaking don’t have a lot of difficulty getting in bigger markets anyway.

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