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Revised Present Value Comparison of Cliff Lee Offers

December 14, 2010 by William Juliano

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.

Posted in Baseball, MLB, Yankees | 2 Comments »

Mystery Discount: Lee Deal Doesn’t Really Leave Much on the Table

December 14, 2010 by William Juliano

(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.

Posted in Baseball, MLB, Yankees | Tagged , | 3 Comments »

On the Whole, Cliff Lee Would Rather Be in Philadelphia; Lefty’s Surprise Decision Leaves Yankees Holding the Bag

December 14, 2010 by William Juliano

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.

Posted in Baseball, MLB, Yankees | Tagged , | 2 Comments »

Government Strikes Out Again in Appeals Court; Acted Illegally in Seizing 2003 Survey Testing Results

December 12, 2010 by William Juliano

The United States government illegally violated the privacy rights of 104 major league baseball players who tested positive for performance enhancing drugs during a survey period in 2003, according to the U.S. Court of Appeals for the 9th Circuit in San Francisco.

The government’s illegal seizure of steroid testing results led to Arod’s eventual admission.

The courts decision was a reaffirmation of an earlier judicial rebuke, but it will undoubtedly come as a small consolation to those players whose names have already been leaked. Regardless of how one feels about players who took PEDs, the government’s reprehensible conduct in seizing the information as well as its irresponsibility in leaking it are by far the much bigger crime.

Although the government will no longer be able to use the list as the basis for further investigations, damage has already been done to players like Alex Rodriguez, whose name was reportedly on the list. After all, the backbone of the allegations against Arod was the illegally obtained list, so had the government not acted outside the bounds of the law, the Yankees’ third baseman would not have been exposed to the scrutiny that eventually led to his admission.

I am sure most people have no sympathy for Rodriguez, or any other player ensnared because of the government’s illegal search and seizure, but that doesn’t change the fact that their rights were violated. If not for the negative public response, players like Rodriguez would be wise to consider suing the federal government for the damages its illegal actions caused. That’s unlikely to happen, but at the very least, hopefully this decision will force federal prosecutors to not only pull in the reigns, but perhaps turn their attention to the more concerning leaks emanating from their ranks. After all, breaking the law and violating the rights of citizens is not worth uncovering PED use among athletes. Perhaps in light of the recent Wikileaks scandal, the federal government now has a better understanding of this principal.

Posted in Alex Rodriguez, Arod, Baseball, Crime, MLB, Yankees | Tagged | Leave a Comment »

Seven-Year Itch: A Look at Starters in Their Age 32 to 38 Seasons

December 11, 2010 by William Juliano

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

In an effort to evaluate whether the Yankees and Rangers are setting themselves up for a fall by offering a long-term contract to Cliff Lee, many have invoked similar deals that were given to the likes of Barry Zito, Johan Santana, C.C. Sabathia, Mike Hampton, Kevin Brown and Mike Mussina. Even if all those pitchers were similar to Lee, it would still be foolish to draw any meaningful conclusion from such a small sample size.

There really is no point in comparing Lee to other pitchers who signed similar long-term contracts. At best it is an anecdotal pursuit. After all, the question we need to answer is whether Lee will be productive over the term of the proposed contract, and a better way to do that is by looking at every starter who pitched from 32 to 38 (the ages Lee would be under a seven-year contract).

Relative Performance of Starters, Ages 32 to 38, Since 1901

  Total ERA+ >= 100 ERA+ >= 120
Lefties 37 32 15
Righties 80 65 19

Note: Includes all pitchers who threw at least 1,000 innings between the ages of 32 and 38 and started at least 75% of their games.
Source: Baseball-reference.com

Since 1901, 397 starters (75%-plus of all games in the rotation) pitched between the ages of 32 and 38. Of that total, 117, or 29%, pitched at least 1,000 innings, of which 83% had an ERA+ of 100 or higher and 29% had an ERA+ of at least 120. Among lefties, the percentage of starters with an ERA+ of 120 or better jumps to 41%.

Based on the data above, it seems that if a starting pitcher is able to stay healthy, he’ll likely be at least league average during his age 32 to 38 seasons. And, if he is a lefty, there is close to an even chance that he’ll be well above average. Looked at in this light, the key question regarding Cliff Lee is whether he will stay healthy over the length of a seven-year deal. Although he has suffered from minor abdominal and back issues during his career, Lee has managed to pitch at least 200 innings in five of the last six seasons (in 2007, he was sent to the minor leagues). The ace lefty also has a reputation for being in good condition and a tireless worker, so there is no reason to think complacency or a premature break down will develop. In other words, Lee fits the profile of a pitcher who should continue to log innings as he progresses deeper into his career. And, once you come to that conclusion, it becomes much more likely that he’ll justify a six- or seven-year contract.

Listed below for further comparison are the top-20 left handed pitchers who meet the criteria referenced above. After his soon-to-be new contract expires, will Lee’s name be added to this list? That remains to be seen, but soon we’ll know whether its the Yankees or Rangers that are sure going to hope so.

Top-20 Left Handed Starters, Ages 32-38, Since 1901

Player From To IP Age GS ERA+
Randy Johnson 1996 2002 1548.2 32-38 210 176
Lefty Grove 1932 1938 1628.1 32-38 183 149
Harry Brecheen 1947 1953 1191 32-38 157 131
Steve Carlton 1977 1983 1854.2 32-38 242 130
Warren Spahn 1953 1959 1929 32-38 240 127
Whitey Ford 1959 1965 1695.2 32-38 243 125
Carl Hubbell 1935 1941 1579.2 32-38 191 125
Thornton Lee 1939 1945 1308 32-38 159 125
Tom Glavine 1998 2004 1544 32-38 239 124
Al Leiter 1998 2004 1360 32-38 213 124
Preacher Roe 1948 1954 1277.1 32-38 173 124
Eppa Rixey 1923 1929 1779.2 32-38 221 123
Eddie Plank 1908 1914 1704.2 32-38 205 123
Tommy John 1976 1981 1322.1 33-38 184 123
Eddie Lopat 1950 1955 1104.1 32-37 148 121
Jamie Moyer 1995 2001 1291 32-38 194 115
Andy Pettitte 2004 2010 1262.2 32-38 203 115
Mike Cuellar 1969 1975 1921.1 32-38 264 114
Chuck Finley 1995 2001 1373.1 32-38 215 114
David Wells 1995 2001 1421.2 32-38 210 113

Note: Includes all left handed pitchers who threw at least 1,000 innings between the ages of 32 and 38 and started at least 75% of their games.
Source: Baseball-reference.com

Posted in Baseball, MLB, Rumors, Yankees | Tagged , | 4 Comments »

Cliff Hanger: Cashman Putting All Yankees’ Eggs into Lee’s Basket

December 10, 2010 by William Juliano

As the Yankees await Cliff Lee’s decision (unless the Marlins are the “mystery team”, at least we know he won’t be taking his talents to South Beach), one thing has become abundantly clear. There is no Plan B.

The Yankees are reportedly willing to pay over $160 million for Cliff Lee’s signature.

Putting all of your eggs in one basket usually isn’t the best strategy, but this offseason the Yankees have one clear cut need and Lee is the only viable solution. From that standpoint, you can’t blame Brian Cashman for having such a singular focus. However, if he fails to reel in his big fish, more than a few people in Yankeeland won’t be so understanding.

During the 2007 offseason, the Yankees were heavily involved in the Johan Santana sweepstakes, but Cashman ultimately decided that the combined cost of money and prospects was too prohibitive. As things turned out, that decision proved to be a wise one because even though the Yankees missed the playoffs in 2008, they were able to retain Phil Hughes and sign C.C. Sabathia the following offseason. Both men not only contributed to a championship in 2009, but remain as the only two reliable starters heading into the 2011 season. But, what would have happened if Sabathia decided to turn down the Yankees’ offer? How then would Cashman’s decision have been viewed (especially if he would up signing Derek Lowe instead)?

This offseason, Cashman is faced with a similar dilemma. Even though Lee’s Rangers booted the Yankees from the ALCS, his decision to hold onto wunderkind Jesus Montero will likely be lauded if the Yankees eventually land the ace lefty in free agency. Should Lee decide to return to Texas, however, history may not be so kind.

Let’s journey back to July 8 (amusingly, the same day LeBron James made his infamous “Decision”) for a moment. According to numerous published reports, the Yankees had acquired Lee from the Mariners for Montero and a package of secondary prospects. The deal was so close to being consummated that Lee even reached out to Sabathia for advice on where to look for a house. The next morning, however, the nomadic lefty found himself headed not to New York, but to Texas. Why? Because the Mariners became concerned about an injury to minor league second baseman David Adams and Cashman refused to substitute Eduardo Nunez or Ivan Nova in the deal.

Although it was first reported that the Mariners backed out of the deal, later clarification revealed that it was actually Cashman who turned them away. Although no one could blame him for being shy about dealing Montero, the fact of the matter is he had already decided to part with the Yankees’ top prospect. In other words, it was really Nunez or Nova who held up the deal.

Could the Yankees’ reluctance to trade Eduardo Nunez end up costing them Cliff Lee?

Compromising the team’s championship chances in one season is sacrifice enough, but if the Yankees fail to sign Lee as a free agent, the opportunity cost will increase exponentially. Presumably, had the Yankees completed the deal for Lee last July, re-signing him would have been much more of a formality. Although many had viewed Lee’s eventual migration to the Bronx as a foregone conclusion, the Yankees are now on the verge of losing out completely. Had Cashman known how difficult it would be to sign Lee, one wonders if he would have allowed Nunez or Nova to scuttle the original deal?

Even if he isn’t able to sign Lee, Cashman can still serendipitously come out smelling like a rose if Montero quickly emerges and comes close to realizing his potential. If that doesn’t happen, however, he’ll likely be given an amount of blame equal to the credit he received for the series of events culminating in the Sabathia acquisition. Although he has no control over Lee’s eventual decision, allowing him to have a good experience in Texas is a worthy second guess. Also open to valid recriminations is Cashman’s failure to be more active for a pitcher like Dan Haren, who if acquired last season would have lessened or even eliminated the need for Lee.

To this point, we’ve dealt with the worst case scenario, but it remains just as likely that the Yankees will be able to sign Lee, in which case Cashman will once again hit the jackpot. After all, putting all those eggs together comes with risk, but it can also offer a great reward. Never afraid to take a chance, Cashman is now in the position of waiting to see how his gamble will payoff. Although he would have liked the process to be over easy, the bottom line is he now needs to hope his offseason plans don’t wind up scrambled.

Posted in Baseball, MLB, Trades, Yankees | Tagged | Leave a Comment »

Random Thoughts on Red Sox Signing Carl Crawford

December 9, 2010 by William Juliano

Various outlets are now confirming Pete Abraham’s report that the Red Sox have inked Carl Crawford to a whopping seven-year, $142 million deal, which although not an unexpected outcome is somewhat surprising considering the length and dollar value of the deal. Nonetheless, the Red Sox have made another move that should boost their ballclub over the long-term, and in the process thrown down the gauntlet to the Yankees. Listed below are some thoughts on the deal as well as other immediate ramifications:

1)      If the Crawford camp was willing to move quickly with the Red Sox, does that mean they believe the Yankees are about to sign Cliff Lee, which would have removed a possible suitor from the bidding process? If so, the news that Lee will now make a decision over the weekend could foreshadow his future in pinstripes.

2)      Carl Crawford is a quality player, without a doubt, but 2010 kind of stands out as a career year. If he reverts to his previous norm, is $20 million really a reasonable price? Probably not, but although they hate to admit it, the Red Sox make lots of money. So, like the Yankees, they can pay a premium for talent. Once concern, however, is defense. Much of Crawford’s value is related to his ability to play an excellent left field, but much of that contribution will be mitigated by playing 81 games in front of the Green Monster. In other words, the Red Sox will be paying for a talent that Crawford can only use on the road. Although a less than optimal use of resources, it is a sacrifice a team like Boston can afford to make.

3)      If the Yankees get Cliff Lee and Andy Pettitte returns, the team’s top three pitchers would all be left handed. With the addition of Crawford and Adrian Gonzalez to a lineup that also includes JD Drew and David Ortiz, that could provide the Yankees with an advantage when playing their rivals.

4)      Much is often made about the Yankees and Red Sox always trying to one-up each other, but the fact of the matter is both teams actually wind up being better off when their rival is strengthened. Why? Because it weakens the rest of the league, which in turn makes it more likely that both teams will make the playoffs. By Crawford signing with the Red Sox, the Rays have been weakened and the Angels failed to improve. If the Yankees sign Lee, the Rangers take a hit. In other words, there may not be a third team capable of challenging the two AL East powers.

Posted in Baseball, MLB, Red Sox, Yankees | Tagged | 5 Comments »

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