Why $63 Million for Yoan Moncada Makes Sense by Dave Cameron February 23, 2015 For the last few months, the baseball world has been speculating about Yoan Moncada. The question of who would sign him was less interesting, as the structure of the deal — a 100% tax on the signing bonus, due by the middle of the summer — meant that this was a bidding war that only teams with significant cash flows could justify winning. From the beginning, the Red Sox, Yankees, and Dodgers were identified as the heavy favorites, and in the end, Boston won the battle of the big spenders. More interesting was the question of how much Moncada would sign for, because this was a bit of a unique situation in MLB. Because Moncada could only be lured with a signing bonus, and because of the tax on the signing, teams were being asked to spend significant present dollars for a chance to buy potential future wins. While this happens on a small scale in the draft and with other young international prospects, teams generally do not have to make these kinds of short-term investments without getting short-term rewards. The last time I wrote about Moncada, I noted some similarities between signing Moncada and paying the posting fee for a player coming over from Japan, which pushed over $50 million for both Daisuke Matsuzaka and Yu Darvish. Those players also came with a steep up-front cost and hadn’t proven themselves as big league contributors, but neither one spent a day in the minor leagues before jumping into their team’s rotations; they were viewed more as major league free agents, just without the track record that other big league free agents bring. Moncada has the short track record in common, but unlike Darvish, Matsuzaka, and Masahiro Tanaka, he’s not big league ready. The consensus is that he needs a year or two in the minors, and given that he’s just 19, that might even be aggressive. It wouldn’t be at all strange for him to not make a significant impact at the big league level until he’s 22 or 23, as even the prospects teams are most sold on don’t always develop as quickly as expected. So, the Red Sox $63 million investment — once you double the signing bonus to account for the tax — will likely return little or no value for several years, and because even very good prospects still have high failure rates, there’s a real possibility that this investment never returns anything at all. But that doesn’t mean he’s not worth the risk. Every signing is a balance of risk and reward, with the amount committed an attempt to find the sweet spot between the chance of success and failure. The more upside there is, the more risk a team should be willing to accept in order to get the chance for that best-case outcome, and while Moncada undoubtedly carries a significant amount of risk, he also comes with significant long-term potential. For instance, let’s look at what a $63 million investment might suggest the Red Sox think is the likely range of outcomes for Moncada. In this graph, I’ve plotted a series of probabilities for various outcomes, ranging from Moncada being a complete bust to him turning into a superstar. The Team Controlled Value axis is an estimate of his value above and beyond his pre-arb and arbitration salaries, which is why the odds of him being worth $200+ million over his six to seven years of team control are so low. That kind of performance would naturally lead to quickly escalating arbitration prices, so Moncada would have to be worth something close to $40 million per year — making him a consistent +4 to +5 WAR player — in order to reach those levels. This is the Andrew McCutchen outcome, basically. More likely, Moncada does not become McCutchen, or even anything that close to him. History suggests a better chance that he turns into something closer to Neil Walker, which is approximately what the middle of that graph represents. The most likely single outcome is that he develops into nothing of value, but the probability of all the success added together are more likely than the chance of failure. The graph above is an example of what the the Red Sox are betting on, based on the signing price. Broken down into numbers, the graph’s probability distribution would look like this: Probability Surplus Value Justified Cost 24% $0.00 $0.00 6% $25,000,000.00 $1,500,000.00 18% $50,000,000.00 $9,000,000.00 20% $75,000,000.00 $15,000,000.00 15% $100,000,000.00 $15,000,000.00 14% $125,000,000.00 $17,500,000.00 2% $150,000,000.00 $3,000,000.00 1% $175,000,000.00 $1,225,000.00 0% $200,000,000.00 $600,000.00 Total $62,825,000.00 The percentages are rounded to the whole number, so don’t worry, I don’t think $200 million multiplied by zero percent is $600,000. As the graph and table show, however, the Red Sox aren’t really betting on Moncada turning into a $200 million player. They don’t need him to become a superstar to justify this price; the $63 million commitment works if his most likely outcome is a good-not-great player, with significant bust potential but also some slight chance of turning into a superstar. Now, keep in mind, I made these probabilities up to demonstrate what the price the Red Sox paid suggests that they may see as his outcome range. But this price fits pretty well with what the public valuation estimates that have been produced of late. As we’ve noted a few times lately, the most recent research on prospect rankings suggests that the average value produced by a top-10 hitting prospect during their team control years is roughly +15 WAR. If Moncada produces something like that from 2017 to 2023 — assuming the Red Sox will hold him in the minors long enough to get a portion of the seventh year from him — and the cost of a win keeps increasing at the rate it has been increasing, then he’d produce somewhere in the neighborhood of $125 million in value. But, he’d also have to be paid salaries for each of those years, and if he’s producing at those levels, he’s probably looking at something like $30 million in arbitration awards and pre-arb salaries, which have to be factored out of the value added, knocking him down a bit below $100 million in overall value. $95 million is certainly more than $63 million, but we have to also account for the time differences in the money spent and the wins produced; those 2017 to 2023 wins came at the expense of $63 million in 2015 dollars. So, we have to adjust the value of those future wins into today’s dollars, which looks something like this. Year Value 2015 2016 2017 $5,000,000.00 2018 $10,000,000.00 2019 $10,000,000.00 2020 $15,000,000.00 2021 $15,000,000.00 2022 $20,000,000.00 2023 $20,000,000.00 Total $73,131,318.67 $95 million in future value, discounted at 4% percent year — the discount rate MLB and the MLBPA use in their calculations — with no value returned for the next two years equals $73 million in today’s dollars. That’s still $10 million more than the Red Sox actually spent, but perhaps that’s the risk premium that is attached because of the fact that teams haven’t scouted Moncada against minor league pitching. That +15 WAR projection came from the results of top-10 hitting prospects, which Moncada may be, but top-10 hitting prospects generally only reach that ranking level after they’ve performed well in the minor leagues. Moncada hasn’t yet, so perhaps teams priced that level of risk into their offers. Personally, I’m a bit surprised that the bidding topped out at $63 million, given the players involved. The Yankees and Dodgers are both being hit with significant Luxury Tax penalties based on their big league spending, so they don’t have a tax-free avenue to spend $31 million to acquire additional talent. But again, this is a unique circumstance. Teams are generally not asked to spend big time current dollars to buy potential future wins; even long-term contract extensions push the big money back into the years where the value is expected to be produced. So perhaps this was a tougher sell to ownership groups than I had imagined. Writing a couple of big checks, and then not seeing any return for several years, with a real chance of never seeing any return, is probably a difficult pitch. That said, if Moncada is as good as has been reported, this feels like a bargain. The Red Sox committed less guaranteed money to Moncada than the Diamondbacks did to land Yasmany Tomas, and while Moncada might not be a 2015 player, the difference in upside here seems to be worth the wait. Toss in the potential for value beyond the just the team control years — the Red Sox now have exclusive rights to sign him to a long-term deal if he does become a superstar — and this price feels light to me. Of course, I’m not the one writing the check, but I would expect that we’ll probably look back at this and wonder why the Yankees didn’t bid $35 or $40 million to keep him away from their biggest rivals.