Looking for Upside in the Tanaka Contract

I was on vacation last week, so in my absence, Jeff Sullivan handled the write-ups relating to Masahiro Tanaka signing with the Yankees. When the news broke on Wednesday, he wrote a couple of posts about it, and in typical Jeff Sullivan fashion, the second post was explicitly “not an evaluation of the Masahiro Tanaka contract.” Jeff’s takes are smart and nuanced, and you should read them, but I also think the Tanaka contract is worth an evaluation, especially because it is so different from most free agent contracts.

In general, most free agent deals are not that difficult to evaluate. The majority of free agents are already on the downside of their career, so there’s a tension in the negotiations between the player trying to get as many years as possible and the team trying to limit their obligations to an aging player who is expected to be get worse in every subsequent season. In recent years, it seems that negotiations have mostly shifted away from bidding in annual average value into almost entirely bidding on years, where the signing team is the one who guarantees one year more than the rest of the bidders. Negotiations for free agents can be pretty accurately described as a push and pull between teams and players over the number of guaranteed years the player is going to receive, with most everything else being secondary to that agreement.

Due to his age, however, Tanaka’s situation is entirely different. Because he has no Major League service time, he was automatically going to be under team control for a minimum of six years unless his agent negotiated an exception into the contract. The bidding essentially began at six years simply due to the service time requirements for free agency, as there was no reason for him to accept a shorter term contract that would still keep him under team control through 2019 without guaranteed payments for all six years. The Yankees eventually won the bidding by guaranteeing a seventh year, but they didn’t just stop there; they also gave Tanaka an opt-out after the fourth year of the contract, giving him both long term security and the flexibility to hit free agency again after his age-28 season if he so chooses.

For Tanaka, the Yankees offer was the best of both worlds. He is guaranteed $155 million in salary over the next seven years, but because of the opt-out, he can collect $88 million over the next four seasons and then hit it big again in free agency after 2017 if he proves to be as good as everyone thinks he may be. If he turns into an ace, given the inflation we’ve seen in MLB and the economic strength of the sport, it’s not hard to see his next contract pushing over $200 million over six or seven years, so the opt-out gives Tanaka a chance to end up with total earnings of between $250 and $300 million over the next decade.

So it’s not difficult to see why Tanaka is a Yankee. They beat the field in total years (and total dollars, naturally) and still gave him the opt-out clause, so it’s probably fair to say that no other team was particularly close to the Yankees offer in terms of both potential revenue and guaranteed money. As Jeff talked about, this is the kind of contract we’re used to seeing the Yankees give out, and it’s the kind of contract that can be chalked up to them being the Yankees and having more money than is necessary to build a championship club. They did this because they can, and it won’t hurt them because they’re the Yankees. If the deal goes badly, they’ll just sign someone else to replace Tanaka, because the funds are basically unlimited once they decided to not stay under the luxury tax.

There’s a problem with that line of thinking, though. Even after signing Tanaka, the funds are clearly not unlimited, and his signing hasn’t led to a wave of new spending that fixes the rest of the Yankees problems. They still have Kelly Johnson penciled in as their starting third baseman, and Brian Roberts is the favorite to play second base for a few innings on Opening Day until he gets hurt again. Derek Jeter may or may not be able to play shortstop anymore, and if he can’t, then the Yankees are counting on Brendan Ryan to be a regular. Their fifth starter is David Phelps. Either Ichiro or Alfonso Soriano are going to be in the line-up as the RF/DH on a daily basis, and both project as somewhere between replacement level and below average for next year.

This Yankees team still has some pretty serious problems, and the structure of this contract makes me wonder why the Yankees pursued this particular strategy rather than using the same amount of money to pursue a variety of players instead. Especially once the decision was made to be willing to include an opt-out in Tanaka’s contract.

The entire point of signing Tanaka instead of pursuing the veteran MLB free agents is that his youth brings the promise of both short term and long term value. This wasn’t supposed to be the kind of deal where the team gets value up front in exchange for taking on an albatross at the back. Tanaka was appealing because he can help you in 2014 and 2018, and his contract price reflects the value of his youth. But the opt-out changes that calculation, because in reality, the Yankees don’t have Tanaka for 7/$155M; they have him for 4/$108M.

That is what this contract will cost them if it works out. Tanaka will make $88 million in salary over the next four years, and the Yankees will have paid $20 million to obtain his rights, so their total cost before the opt-out is $108 million. If Tanaka pitches well and stays healthy, he’ll void the last three years of the contract and look for a big raise. The only way the Yankees get Tanaka for years five, six, and seven is if he’s either been a bust or gets injured, in which case, the Yankees probably will have to pay Tanaka $67 million for three years where he’d be expected to provide less value than what that money could have bought them in free agency. The opt-out basically kills the idea of this contract providing long term value and turns the contract into a 4/$108M deal for the Yankees, with a chance of having to fork over extra money if the deal goes south.

For $108 million over the next four years, the Yankees could theoretically have ended up as the high bidders for Matt Garza and Jhonny Peralta, who are pretty likely to outproduce in the short term and maybe even in the longer term, depending on how well they age. Or, if you don’t like that pair, Ricky Nolasco, Jason Vargas, and Omar Infante will combien to make $111 million for the next four years, and it’s going to be tough for Tanaka/Phelps/Roberts to outperform that trio in a significant way.

If you believe Tanaka is going to maintain more of his current level of performance over the next few years, then sure, maybe you’re a little bit better off with Tanaka and a couple cheap scrubs than you are with three market priced average players, but getting Tanaka for 4/$108M also required risking the extra $67 million if things go poorly. The downside to putting most of your eggs — and then a few batches of extra eggs — in the Tanaka basket is clearly greater than if the Yankees had just used the same money to sign multiple domestic free agents, but I’m not sure I see a corresponding upside to offset the risk of giving him the option on years five through seven.

The market price for wins this winter has been around $6 million apiece; to justify $108 million over the next four years, that puts Tanaka at +18 WAR from 2014 to 2017. There were exactly five pitchers in MLB who posted +18 WAR over the last four years. To come out ahead relative to what they could have gotten by just signing regular old MLB free agents, Tanaka would have to be a Cy Young contender year in and year out, and that’s just to justify the $27 million per year commitment through 2017. Toss in the extra $67 million the Yankees risked in the scenarios where things don’t go well, and the paths for this contract to hurt the Yankees seem far more reasonable and likely than the ones where this contract would look like a good idea in retrospect.

As just a straight seven year commitment, it isn’t that hard to see this deal working out for New York. With inflation, the back end of a 7 year, $175 million payout won’t be that problematic, and Tanaka would only be 31 in the last year of that deal, so he could very well be the rare free agent to be worth his salary at the beginning and end of the deal. But the opt-out changes things, and essentially eliminates the chance that the Yankees can get long term value from this contract, which was the primary selling point in signing Tanaka to begin with. And because the posting fee is paid before the opt-out, they’re actually forfeiting the right to the lowest AAV years in terms of total cost, making it even tougher for this price to be worth paying relative to just applying $108 million to alternative options.

Even if you factor in the fact that only $88 million goes to the luxury tax and the potential that they’ll be able to get a discount on Tanaka’s next deal by owning his rights before he gets to free agency, I just have a hard time seeing those small values being worth the extra risk of the $67 million they agreed to pay in years five through seven if things go south. To put up that kind of back-end payoff that only kicks in if he’s a bust, you’d expect there to be some real value to the Yankees before the opt-out to offset the risk that they’re taking in guaranteeing him seven years without getting seven guaranteed years back. And at $27 million per year in total costs, it’s hard to see the short term value in Tanaka relative to the market price of domestic players.

I see a lot of ways this contract can go badly for New York, and very few ways in which this contract is likely to have been better than just going after a couple of the mid-tier free agents for the same total cost. The Yankees should absolutely put a high price on their own marginal wins, but in doing so, it’s hard to justify going into a season with so many weak spots when there were upgrades available that ended up in other cities. If we’re going to play the “it’s the Yankees, who cares about the money?” card, then we have to answer why they still have so many holes on their roster, and why this still doesn’t look like one of the five best teams in the American League.

From here, it looks like the best case scenario for the Yankees with the Tanaka contract is that it provides about as much value as signing any collection of domestic free agents would have, only the worst case scenarios are much, much worse. Had the Yankees not included the opt-out, this deal could have had a very good chance of working out for them. Had they structured the payments differently so that more of the guaranteed money was after the opt-out, so that they ended up with a serious bargain for the first half of the contract if things went well, then this deal probably could have worked out too. Had they simply limited it to a four year, $108 million payement in total, making Tanaka a free agent again after the 2017 season with no commitment beyond that, it would have been an expensive deal but not much more expensive than what other free agents were signing for.

But giving him the opt-out and the extra three guaranteed years seems like a mistake to me. It’s too much risk and not enough reward. For an organization that drew a line in the sand on the risk/reward proposition of Robinson Cano’s decline phase, I don’t really see how this contract is more likely to turn out in their favor. Instead of taking a 10 year risk on an elite position player, they took a seven year risk on a questionably elite pitcher. I don’t really see too many scenarios where $240 million for Cano is insane but $175 million for Tanaka is rational. Either they’re both crazy or they’re both great, and if the Yankees really had unlimited funds, maybe they should have signed both.

But they don’t have unlimited funds, and we shouldn’t pretend that they do. In reality, the Yankees chose Tanaka over other players, and are going to go into 2014 with a flawed roster because they allocated so much of their money to outbidding everyone for Tanaka’s services. At this price, I wouldn’t be surprised if this was a decision they came to regret, and maybe sooner than later.





Dave is the Managing Editor of FanGraphs.

151 Comments
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LOL
8 years ago

Uhm… Ichiro is going to be on the bench.. and Soriano the DH. Did you forget about Beltran?

Cool Lester Smooth
8 years ago
Reply to  LOL

Yeah, I was about to say…

Cool Lester Smooth
8 years ago
Reply to  Dave Cameron

You’re right, one of those two will be in the line-up on a daily basis.

His name is Alfonso Soriano.

Ichiro is Soriano’s backup.

NS
8 years ago

Boy, you really straightened him out. This was definitely worth commenting on.

Cool Lester Smooth
8 years ago

Yes, it was.

It’s like if he characterized the Rays’ CF situation by saying “Either Desmond Jennings or Sam Fuld is going to be in the line-up as the CF on a daily basis….”

Ichiro is the Yankees’ fifth outfielder. He will not be seeing significant playing time. He will play RF on occasion, just like Sam Fuld played CF on occasion last year.

His characterization, while factually correct, was inaccurate.

Cool Lester Smooth
8 years ago

Damn, the downvoters are out in droves!

Can anyone do me the favor of refuting me or, failing that, contribute any evidence towards my not being 100% correct? Or do you just prefer to cost me precious, precious internet points behind multiple shrouds of anonymity?

RobM
8 years ago

Cool Lester, you are correct.

The Yankees have Gardner, Ellsbury, Soriano and Beltran rotating into the three OF slots and the DH. Ichiro will see little playing time. It is Soriano and Beltran who will be rotating between RF and DH, not Ichiro.

pft
8 years ago
Reply to  Dave Cameron

I see Ichiro as mainly a defensive replacement for Beltran or a pinch runner. He will occasionally start in RF to give Beltran a day off, but I would be surprised and disappointed if he is ever penciled into the lineup as a DH, and I would be equally surprised if Soriano ever gets a start in RF

Cool Lester Smooth
8 years ago
Reply to  pft

How dare you disagree with Dave?!

Travis L
8 years ago
Reply to  pft

I believe Beltran usually got 1-2 days off per week (usually the Sunday day game) last year. Assuming the Yankees continue that pattern, Ichiro will likely see a decent chunk of playing time when you add in defensive replacement in late innings, and the highly likely chance that Beltran or Soriano spend significant time on the DL.

Personally, I wouldn’t be surprised if Ichiro had over 300 PA this year.

Cool Lester Smooth
8 years ago
Reply to  pft

I think Brendan Ryan is more likely to get those innings than Ichiro. Jeter is going to need time at DH.

lushlife
8 years ago
Reply to  pft

Disagreement is irrelevant; opinion is the whole point. A post’s merit depends whether you are informed or uninformed, and polite or a jagoff. I’m sure you know where you fall there.

Cool Lester Smooth
8 years ago
Reply to  pft

Ah, I guess I got a little too uppity about the fact that Dave incorrectly described the Yankees’ RF/DH situation.

I guess it’s only right that I be chastised. After all, a cavalier does not engage with a knave in such degrading activities as “fact-based discussions” or, failing that, “intelligent arguments.”

A true gentleman engages in the Preston Brooks school of discourse.

Michael Law
8 years ago
Reply to  LOL

I am replying to the article in general and not to you directly because I didn’t see an add comment for the article at the top of the thread. One thing that I didn’t see addressed in the article or the comments really was the payroll obligations that the Yankees have on the books for 2014 versus 2018. They are past the 189 million mark and if I’m adding it up correctly it looks like they are somewhere in the 195 million dollar range right now without adding any additional pieces. And Tanaka can opt out after the World Series has concluded in 2017. But at that same time the contracts for CC Sabathia, Alex Rodriguez and Mark Teixeira will be off of the books. Beltran as well and Derek Jeter, Alfonso Soriano and Hiroki Kuroda as well. At this point if Tanaka opts out the guaranteed salary commitments for the Yankees in 2018 will be about 38 million dollars. I know that they will add players between 2014 and 2017 but my point is that all a lot of money will have come off of the books by then and if Tanaka ends up being a true ace in New York they can offer him a new high dollar contract and still maintain a payroll of some kind. They will always be at or over the salary line and the line will have bumped up a few ticks between now and 2018. They will always have a few players with 20-28 million dollar yearly earnings.