Sox Owner Replies to Penny Pinching Charge

[TLAK]

Greg Couch wrote a column in the Sun-Times Thursday lambasting the White Sox ownership for not spending more on the team. He ended with:

 

Penny pinching starts at home

 

The only thing is, the people cutting off Williams' arms are his own bosses. The Sox have 2 million fans, an unbelievable stadium deal, a great radio deal, ownership in a TV station, a city full of corporate sponsorship possibilities, an immensely successful and savvy owner in Reinsdorf.

 

But we've complained about Reinsdorf before. He might own a bigger chunk of the team than anyone else, but supposedly that's not more than 10 percent. When the Sox fail, it's not just him, but these other guys, too. And they need to put pressure on Reinsdorf to win, not just to make money. Or maybe Reinsdorf needs to pressure them for more money.

 

However it works, when the Sox fail, the silent partners shouldn't be able to just sit back quietly collecting the profits.

 

Fred Brzozowski, Eddie Einhorn, Robert Judelson, Judd Malkin, Robert Mazer, Allan Munchin, Jay Pinsky, Larry Pogofsky, Lee Stern, Sanford Takiff, Burton Ury, Charles Walsh.

 

Brothers, can you spare a dime?

 

 

Full Couch Column

 

Lee Stern replied in a letter to the editor, this is in today's Inbox page in the sports section. I couldn't find a link so bear with my transcription.

 

Having been an owner-director of the Chicago White Sox since 1975 (the Bill Veeck era), joining Jerry's group as a member of the corporate General Partnership and a director since 1981 and speaking only on behalf of myself, I think my comments can merit credibility  ("Prudent investor Williams lands his latest high-risk superstar," Dec 23).

 

First of all, the Veeck group sold out to the Reinsdorf group, and my profit on that $300,000 investment of $200,000 was only a result of the increase in team values and not a result to Bill V.'s genius.  It was a very nice return for a six-year investment, but not excessive during that period of high interest rates and other speculative opportunities.  Now let's talk about today and we fat cats as investors in the White Sox.  The only money -with maybe a very small exception- that the investors have ever received was to pay taxes for phantom profits.  The tax laws changed drastically in 1986, and the losses incurred by the investors during the previous years could not be offset by profits in later years, therefore resulting in taxes owed.  Let's not forget that whatever profits did occur were plowed back into the team.

 

No one has sat back and reaped profits into their own pockets, so let's stop the misinformation and recognize that the problems in winning are more a matter of the product on the field, injuries and screwball economics regarding player values in baseball.  If you want to criticize ownership for poor baseball decisions, then do so, but don't accuse the investors of lining their pockets with fool's gold or even the real McCoy.

 

Lee B. Stern, Chicago

Mr. Stern's comments are consistent with many 'insider' posts on how the team is run. I'd just like to add that many companies do not pay dividends or distribute profits regularly, investor's reward is in the form of appreciation of the value of the investment. Although the Sox are not mailing out monthly checks, ownership is doing just fine. The Riensdorf group paid $20 million for the team in 1981. Forbes valued the team at $213 in 2001. This rate of return is about 95%, considerably better than I did on my 401K. Many growth companies plow some of this paper profit back into the business, either through borrowing or selling additional shares. Mr. Stern did not discuss this aspect.

[Guest JimH]

IMO, Stern is an honorable guy and respected Chicagoan who made his fortune at the Board of Trade.

 

None of these guys need money from the White Sox whatsoever, they have significant money from other ventures.

 

The issue I continue to have is an unwillingness to push the payroll beyond projected revenues (even once), create a major buzz around the team, and tell the public exactly what they're doing. Make a major acquisition and tell the public, "hey, we're going beyond our means here because we want to win but we're not gonna make a habit of going beyond our means". Basically, getting the acquisitions the fans want, and put the ball in the fans court.

 

To my knowledge or recollection, they've never done this, although the team was in the red for a few years in the 80's and possibly late 90's as well.

 

I also dislike the philosophy of waiting until late June before making the major acquisitions. That philosophy failed them in 2004 IMO. The games in April and May are just as important. This winter, I see a subtle philosophical shift and I like it. 5 starters, solid OF, solid bullpen. There are several holes but the pitching has been upgraded. It'll be much easier to find middle infielders either now or during the year.

[LDF]

in order to prove his point of little or no profits and the re-investing of the little profits back into the org. let him open his books and see excatly what the money numbers looks like.

 

then he will either prove his point or be proven a liar.

[Clarkdog]

The most telling sentence in Stern's reply is this:

 

No one has sat back and reaped profits into their own pockets, so let's stop the misinformation and recognize that the problems in winning are more a matter of the product on the field, injuries and screwball economics regarding player values in baseball.

 

I can't say that I disagree. It's clear that the organization is fundamentaly against the current trend of baseball economics. Don't get me wrong, a player like Carlos Beltran would be great to have on any team. But is he worth 7 years at 16 - 18MM per year? To tie up almost 25% of your payroll into one player for the next 7 years with no guarantees?

 

I predict the Sox will be the hawks once again when the new CBA is negotiatied in 2007 (?). It would be interesting to see just how many players the Sox have under contract for the 2007 season.

[YASNY]

TLAK and JimH have interesting and valid points. In fact, they are so valid that George Steinbrenner actually used the two points...

 

1. Reinvesting the "paper" profit in to the team

2. Which in turn allowed NY to "go for it"

 

.... to rebuild the Yankee dynasty and put them in this position of having so much income that they can afford to make $80 million mistakes like a steriod enhanced first baseman.

[greg775]

I just wish these guys would sell, then.

Maybe there is no local owner who would buy the team.

[SuperSteve]

Wow, all I can say is I am glad he sounded off on it.

[Jake]

white sox brass with balls? never seen that before

[upnorthsox]

Interesting comments by Mr. Stern, even more interesting in what he didn't say than what he did. First he decides to answer to a throw off line that if removed from the story would not take away from it's main point one bit. Fine, I guess that's his perogative but it illicits no sympathy from me. So his shares don't pay a dividend, great I own lots of shares in my company too and they also don't pay a dividend but that doesn't mean my company isn't profitable(and there's soo many ways to disguise that too btw). Indeed, that he goes rambling on about unfavorable changes in the tax code is a big red flag to me. Now one thing that always gets me about people complaining about paying taxes is that first you've had to make a profit before you're taxed, the rate and/or how the tax is accrued effects your net take but you've still made profit.

 

He also says that the Sox have paid him the taxes on these profits of his, a nice arrangement, but since you don't prepay capitol gains taxes and profits have already been taxed at the corporate level, this would suggest there's some mechanism in place to hold these profits for future disbursement. Now in a publicly traded company, these are either rolled into the company's cash reserve(and thus reflected in the stock price) or payed out in dividends, in a limited partnership such as the Sox these profits can also be rolled into a partnership trust where they accumulate over the yrs and with the taxes having already been paid, when the partnership trust is desolved and the funds distributed the only taxes paid are on the capitol gains from the interest accrued by this trust account. This btw is seperate from appreciation realized from the sale of the business. Also, in his defense, this doesn't mean that the Sox are profitable EVERY yr, it's just that when they are funds can be deposited into the account for investments(say tax free shares of a new comcast sports channel maybe???) and later disbursement without a direct payment that yr to the partners.

 

As I said, what he didn't say was as interesting as what he did and what caught my eye here was that he made no mention of having to put more money into the business at any point. This btw was exactly the main point that Couch was making in his article. As someone who has just done a kitchen remodel I have both sympathy for him here and no sympathy at all. It was hard for me to write those checks but I did so with the knowledge that I'd be able to recoup most of it on the sale of the house. Was it worth it to me? Hell yea, not only as an investment but also in the quality of my life now.

 

In the Sox case, can such an investment pay off? In all the ratings of where the Sox are in revenues and payroll and such, the one place where they are head and shoulders above anyone else in baseball is growth potential. They can not only increase their appreciation on a future sale but also their profits now. This doesn't even have to come "out of pocket" from the partners because, as the Forbes article points out, they carry one of the lowest debt loads in the business. Instead, we get frugality and whining about players salaries which suggests they are content with the current profit return and a chance to say "I did it my way" in how the business is run.

 

Damm, I just wanted to rebut a few things said and all of a sudden I'm writing a fricken novel!!!!

 

Let me just close by saying if you want to run the business philisophically, fine. If you want to leave your growth potential untapped, fine too, these are your perogatives. But in doing so, if you choose to ignore the main objective of this business, winning, and instead ellicit sympathy by crying poor then I have only one response: 1917!! Do you feel my pain?

[chisox05]

To be in the middle of the pack payroll wise in one of the 3 major cities is ridiculous.

[Texsox]

Stern has owned the team since 1975, WHY? What benefit is he receiving? Is it a gift to the community? Is he trying to earn a profit? Part of his retirement planning? Does he want to be an owner for the parade down State Street if the team wins something?

 

The only thing that will move the Sox into #1 in the city is a World Series appearance. IMHO there are about the same number of hardcore, smart, baseball fans on both sides of the city. We are fighting for the casual fan's dollar. The people that go to a game for the atmosphere, the "I was there", basically the fans we criticize for going to Wrigley. Advertising will only help a little, special dates, favorable scheduling, etc. will also help a little bit. The only proven method, and it works in all sports, is winning. Investing in a star is nice, but winning is better.

 

Spend it and they will come . . .

[Steff]

upnorthsox.. good comments, and I aggree with a lot of what you posted. But I have a lot of respect for Stern and believe him completely without him having to "open his books" as LDF suggested (plus having seen many of the "books" I know they are not raking in the cash). If they were doing something shady.. the IRS would be hounding them, and by opening his mouth he invites such an event. Stern is, IMO, the smartest member of the board. I'm glad he shot back.

[shakes]

The most telling sentence in Stern's reply is this:

 

 

 

I can't say that I disagree.  It's clear that the organization is fundamentaly against the current trend of baseball economics. Don't get me wrong, a player like Carlos Beltran would be great to have on any team. But is he worth 7 years at 16 - 18MM per year? To tie up almost 25% of your payroll into one player for the next 7 years with no guarantees?

 

I predict the Sox will be the hawks once again when the new CBA is negotiatied in 2007 (?). It would be interesting to see just how many players the Sox have under contract for the 2007 season.

Jerry is a big reason for the current CBA. He thought it would play to the sox advantage because we are a major market team.

[Steff]

Jerry is a big reason for the current CBA. He thought it would play to the sox advantage because we are a major market team.

Jerry and Company are ONE of 30 owners. The blame is on ALL of them, not just him.

[shakes]

Jerry and Company are ONE of 30 owners. The blame is on ALL of them, not just him.

Your right Steff, I was just generalizing. Jerry gets a lot of bad pub because he is the only one speaking to the media. Besides, I don;t know the rest of their names.

[chisox05]

One day, when i earn enough money gambling, i will buy the whitesox.

 

 

Im hoping to do this by age 25(11 years)

 

 

[southsider2k5]

TLAK and JimH have interesting and valid points.  In fact, they are so valid that George Steinbrenner actually used the two points...

 

1. Reinvesting the "paper" profit in to the team

2. Which in turn allowed NY to "go for it"

 

.... to rebuild the Yankee dynasty and put them in this position of having so much income that they can afford to make $80 million mistakes like a steriod enhanced first baseman.

The big difference being the Sox "paper profits" are no where near what the Yankees make. The Sox have about 1/3-2/5 of the baseball audience in a city of 3 million/metro area 7million. The Yankees have about 2/3 of a city of 8 million people/metro area of 15 million people. The Yankees have a little bit bigger revenue stream to pick from.

[LDF]

The big difference being the Sox "paper profits" are no where near what the Yankees make.  The Sox have about 1/3-2/5 of the baseball audience in a city of 3 million/metro area 7million.  The Yankees have about 2/3 of a city of 8 million people/metro area of 15 million people.  The Yankees have a little bit bigger revenue stream to pick from.

and if you put a winner on the field, a team that goes to the playoff almost every yr or is in the running of it, win a couple of championships, then chi will be a sox team.

 

fans will come if the team is assembled. look at the pick up in fans attendance.

[YASNY]

The big difference being the Sox "paper profits" are no where near what the Yankees make.  The Sox have about 1/3-2/5 of the baseball audience in a city of 3 million/metro area 7million.  The Yankees have about 2/3 of a city of 8 million people/metro area of 15 million people.  The Yankees have a little bit bigger revenue stream to pick from.

The point I was making was that Steinbrenner created an awful lot of that market they draw from by putting a winning team on the field... correction ... A championship team on the field.

[Texsox]

The big difference being the Sox "paper profits" are no where near what the Yankees make.  The Sox have about 1/3-2/5 of the baseball audience in a city of 3 million/metro area 7million.  The Yankees have about 2/3 of a city of 8 million people/metro area of 15 million people.  The Yankees have a little bit bigger revenue stream to pick from.

The Yankees are competing with Boston, the Sox with Minnesota, Cleveland, Detroit, and Kansas City. That should be fit in somewhere as well.

[southsider2k5]

The Yankees are competing with Boston, the Sox with Minnesota, Cleveland, Detroit, and Kansas City. That should be fit in somewhere as well.

I'm not sure I understand what you are saying?

[Texsox]

I'm not sure I understand what you are saying?

That makes two of us . I guess my point is we do not need to spend $150,000,000, we need to maybe spend $90 million to make the kind of move to domination that the Yankees did.

 

I do not believe JR is wiling to do that. He is the consumate everyman owner, enjoying being everyone's friend.

[DBAHO]

That makes two of us  . I guess my point is we do not need to spend $150,000,000, we need to maybe spend $90 million to make the kind of move to domination that the Yankees did.

 

I do not believe JR is wiling to do that. He is the consumate everyman owner, enjoying being everyone's friend.

In a few years I think payroll could possibly be up to that mark, depending on how sucessful the Sox are and attendance figures etc. Payroll has been steadily increasing over the past few seasons though, not like some teams like Philly who have to be cutting payroll.

[Texsox]

In a few years I think payroll could possibly be up to that mark, depending on how sucessful the Sox are and attendance figures etc. Payroll has been steadily increasing over the past few seasons though, not like some teams like Philly who have to be cutting payroll.

As much as I hate to admit it, I believe Sox spending is fair. I would like to see just once filling a hole without digging another. Or possibly doing more than just filling the hole, maybe building something there??

[AngelasDaddy0427]

In a few years I think payroll could possibly be up to that mark, depending on how sucessful the Sox are and attendance figures etc. Payroll has been steadily increasing over the past few seasons though, not like some teams like Philly who have to be cutting payroll.

Sadly by the time our payroll is 90 million it'll do us as much good as our 65 million dollar payroll does us now :headshake