Feeds:
Posts
Comments

Archive for December 14th, 2010

According to Jerry Crasnick, the terms of the Phillies’ deal with Cliff Lee is as follows: five guaranteed years at $120 million (including a $12.5 million buy out) with a sixth year option worth $27.5 million. Based on these terms, below is a revised present value analysis.

Present Value Analysis if Sixth Year Option Is Exercised

  Phillies: 5 Years, $120 million   Yankees: 7 years, $148 million
Year Salary Present Value   Salary Present Value
1 $21,500,000 $21,500,000   $22,000,000 $22,000,000
2 $21,500,000 $20,250,965   $22,000,000 $20,721,917
3 $21,500,000 $19,074,492   $22,000,000 $19,518,085
4 $21,500,000 $17,966,366   $22,000,000 $18,384,188
5 $21,500,000 $16,922,616   $22,000,000 $17,316,165
6 $27,500,000 $20,387,735   $22,000,000 $16,310,188
7       $16,000,000 $11,172,839
Total $135,000,000 $116,102,174   $148,000,000 $125,423,383

Present Value Analysis if Buy Out Is Exercised

  Phillies: 5 Years, $120 million   Yankees: 7 years, $148 million
Year Salary Present Value   Salary Present Value
1 $21,500,000 $21,500,000   $22,000,000 $22,000,000
2 $21,500,000 $20,250,965   $22,000,000 $20,721,917
3 $21,500,000 $19,074,492   $22,000,000 $19,518,085
4 $21,500,000 $17,966,366   $22,000,000 $18,384,188
5 $21,500,000 $16,922,616   $22,000,000 $17,316,165
6 $12,500,000 $9,838,730   $22,000,000 $16,310,188
7       $16,000,000 $11,172,839
Total $120,000,000 $105,553,168   $148,000,000 $125,423,383

Note: Based on a nominal interest rate of 6% compounded monthly. Assumes salary paid in full each year (which favors shorter-term deal).
Source: zenwealth.com

As illustrated by the charts above, Cliff Lee has essentially taken a calculated risk on his own health. If he is able to meet the sixth-year option threshold (200 innings in 2015 or 400 innings in 2004/15), the present value of the two contracts would be separated by $9 million dollars, meaning Lee would only have to sign a $12 million deal in 2017 to come out even. Even though this structure makes the Phillies’ offer less lucrative, it is still very comparable to the Yankees’ deal, and that’s before including tax implications.

Of course, if Lee’s option doesn’t kick in, it likely means he has not lived up to the expectations of the contract, which would further imply that he would not be able to recover the guaranteed money he turned away. However, if he does earn the option, it also allows him to reach free agency one year sooner, which could have an even more significant long-term financial impact.

In summary, Cliff Lee opted for his preferred team on terms that I am sure he feels will end up being comparable to all of the other offers. Instead of trying to read to much in between the lines, those comparing the two deals would be much better off crunching the numbers.

Read Full Post »

(In addition to appearing at The Captain’s Blog, this post is also being syndicated at TheYankeeU.)

Cliff Lee probably wanted to return to Philadelphia all along, but he did not leave a lot of money on the table to do so. Contrary to the prevailing wisdom, the five-year, $120 million deal that Lee signed is not worth much less than what Jerry Crasnick reported was the Yankees final offer of six years at $132 million plus a $16 million player option. In fact, it might actually be worth more. The devil is really in the details, particularly the vesting sixth year option (see comments section for an updated calculation) and incentives that exist in the Phillies’ offer, but even with those blanks left unfilled, we can still get a pretty good idea about how the two deals compare.

Comparison of Yankees’ and Phillies’ Reported Offers to Cliff Lee

  Phillies: 5 Years, $120 million     Yankees: 7 years, $148 million
Year Salary Present Value   Salary Present Value
1 $24,000,000 $24,000,000   $22,000,000 $22,000,000
2 $24,000,000 $22,605,728   $22,000,000 $20,721,917
3 $24,000,000 $21,292,456   $22,000,000 $19,518,085
4 $24,000,000 $20,055,478   $22,000,000 $18,384,188
5 $24,000,000 $18,890,362   $22,000,000 $17,316,165
6       $22,000,000 $16,310,188
7       $16,000,000 $11,172,839
Total $120,000,000 $106,844,024   $148,000,000 $125,423,383

 Note: Based on a nominal interest rate of 6% compounded monthly. Assumes salary paid in full each year (which favors shorter-term deal).
Source: zenwealth.com

Without factoring in the sixth year option, Lee left about $19 million in present value on the table, but that amount can be whittled down by about $1 million if you assume the extra $2 million in annual salary from the Phillies’ offer is invested at about 6% over the life of the deal. Furthermore, when you factor in New York State’s 6.85% top tax rate, which is more than twice that of Pennsylvania’s, the difference is mitigated further.

Even putting more nebulous variables like interest and tax rates aside, it’s still easy to narrow the gap between the two offers. For example, if the sixth year option is worth $16 million, as in the Yankees’ offer, the difference between the two deals would be narrowed to about $6.5 million. Of course, just because he won’t be under contract to Philadelphia in 2017 doesn’t mean Lee won’t be pitching somewhere. In other words, if he is able to negotiate a salary with a present value of $6.5 million (about $9.3 million) in that season, he’d actually wind up coming out ahead.

The bottom line is Cliff Lee did very well by his bottom line. He may have taken less guaranteed money, but in the long run negotiated a deal with the Phillies that is at least on par with the offer he had from the Yankees (and likely the Rangers as well). There’s no need to laud the Phillies’ stealthy maneuvering or applaud Lee for taking a discount because neither is appropriate (at least not until the final details are confirmed and suggest otherwise). Besides, what does it matter anyway? Lee is back where he wants to be and the Phillies are holding four aces. Now, it’s up to the rest of baseball to come up with a straight flush.

Read Full Post »

For the second time in six months, Cliff Lee has slipped through the Yankees’ grasp. According to numerous reports, the off season’s mostly highly coveted free agent isn’t headed to Arlington or the Bronx, but instead is returning to Philadelphia.

Cliff Lee has decided to take his talents back to Philadelphia.

The Yankees reportedly offered Lee a seven-year deal that was worth up to $154 million, but the ace lefty opted to take about $50 million less to join Roy Halladay, Roy Oswalt and Cole Hamels as part of the Phillies’ powerhouse rotation. Coincidentally, just one year earlier, the Phillies acquired Roy Halladay from the Blue Jays and then, in a related move, traded Lee to the Mariners in order to replenish the farm system and free up resources. Who says General Manager Ruben Amaro isn’t willing to have his cake and eat it too?

By signing Lee, Amaro has righted a wrong from last off season. Meanwhile, Brian Cashman has been left to wonder if his decision to abort a trade for Lee in July didn’t wind up costing him in December. Regardless, the Yankees general manager has now been left holding a bag of money…and there’s no one left to whom he can give it.

If the Yankees initial reaction to losing out on Lee is to be a little disorientated, you really can’t blame them. After all, you’d probably have to go all the way back to the off season of 1992 to find another player who spurned the lure of Yankee dollars. That year, the Yankees not only missed out on one, but three highly coveted targets when Barry Bonds, Greg Maddux and David Cone all showed little interest in coming to the Bronx. Of course, that year, the Yankees were coming off six straight seasons at the bottom half of the A.L. East. This time around, however, the team was only one year removed from a championship, making Lee’s rejection seem all the more improbable.

Whatever the eventual reasons for Lee’s decision, the Yankees can’t be distracted by what went wrong. Too much time has already been wasted waiting around for the indecisive lefty, and during their pursuit, the Yankees made no secret of the fact that they didn’t have a backup plan. Unfortunately, when you put all your eggs in one basket, you sometimes wind up with a mess, which is exactly what the Yankees’ offseason has become. Now, it’s time for Cashman to clean it up, but in order to do so, he’ll need to be creative.

The obvious target in the wake of losing Lee is likely to be Zack Greinke, but the Royals have always been known as a very difficult trading partner. So, even if Greinke was a fit in New York, the likelihood of reaching a reasonable deal with Kansas City wouldn’t be great. Instead, the Yankees’ best course of action would be to convince Andy Pettitte to return for one more year and then target a veteran lefty like Mark Buehrle.  This way, the team could assess it needs during the first half of 2011 and react accordingly, instead of paying through the nose by acting out of desperation. In other words, Plan B might simply be another waiting game.

Read Full Post »