Why Einhorn Jilted the Mets

Last Thursday, news broke that the prospective deal was dead between Fred Wilpon and David Einhorn for Einhorn to buy $200 million worth of the Mets, a little more than three months after it was first announced. As is often the case with such matters, both sides blamed the other. Einhorn backed out claiming that the Mets changed terms at the last minute; a Mets source told ESPN New York that Einhorn was lying and that he was the one who changed his terms. It seems that the sticking point of the deal was the point that was always most remarkable: the provision that Einhorn would have an option to buy the entire team from Wilpon. The Wilpons clearly didn’t want to lose control of the team, and it seems likely that they simply balked because they were worried at the prospect.

Einhorn is an investor by trade. Unlike the Wilpons, who made their money in real estate, Einhorn spends his career trying to decide whether to invest in people and companies, rather than buildings or land. And he views baseball as an investment, not an act of charity. In a speech to the Ira Sohn Investors Conference earlier this June, he engaged in an extended baseball analogy to explain how Microsoft was like Alex Rodriguez:

I got the analogy wrong. Microsoft is not A-Rod. The better analogy is that the best parts of the Microsoft product portfolio, particularly the dominant Windows Office and Enterprise server franchises, are A-Rod. Put simply, they are some of the most valuable products ever developed in technology. They are record-setters and hall of famers. But they are only part, albeit a large part, of Microsoft. And having A-Rod by himself does not win championships.

Before the 2001 season, the Texas Rangers signed A-Rod to a record 10-year $250M contract. He spent the three years in Texas and did not disappoint, hitting 156 homers and batting over .300, but the team never won more than 73 games, and the Rangers management and overall resource allocation decisions were more Charlie Brown than Sandy Alderson.

That’s not only precluded them from winning despite A-Rod’s heroism, it eventually pushed them into bankruptcy.

Einhorn won’t invest if he doesn’t believe that the future will benefit him. (He has a good track record, famously shorting Lehman Brothers before the firm went bankrupt in 2008.) What stuck in his craw was an apparent attempt by the Wilpons to get language removed from the agreement which would provide an automatic road for Einhorn to get approval from other major league owners, to allow him to take over the Mets. (Automatic approval itself is prohibited by baseball’s rules.) He explained: “It wouldn’t make sense to invest $200 million into a team and then be denied the ability to exercise a negotiated option [to buy the team] down the road due to the inability to obtain the required vote of other major league owners at that time.”

So now the Wilpons will try to raise scratch from many more investors in much smaller amounts: as ESPN’s Adam Rubin characterizes it, “Getting family and friends to invest in smaller pieces — $15 million here, $20 million there.” The Mets are certainly putting a brave face on it, but unless they have much better friends than I do, it seems hard for me to understand how they’ll find $15 million here and $20 million there. As I wrote in February, it’s hard to sell small shares, as shares that small will give the buyer no ability to control the team, and nonvoting shares have to be sold at a discount — if you’re giving someone less control, you’re going to have to give them more of a stake. Moreover, as Rubin writes, “If that were such an ideal alternative, it stands to reason it would have been Plan A.”

The situation presents several different problems for the team. In the short term, it makes the prospect of re-signing Jose Reyes almost impossible, unless his iffy health scares off nearly every other team on the market. GM Sandy Alderson has already announced that the team’s payroll will be down to $100-$110 million next year, about $40 million less than the current payroll, which Rubin reports is around $140 million, and Alderson appeared to throw water on the notion of keeping Reyes:

When you have $75 million of that tied up in four or five players, some of whom aren’t playing, it’s not a good situation to be in where you’re trying to fill out the rest of the team and be competitive in a very difficult division.

The $200 million from Einhorn would not have gone directly into the payroll, but losing that money does nothing to improve the team’s financial stability or health, and, as Alderson notes, the team already faces questions about their long-term financial competitiveness in a difficult division with the Phillies, Braves, and improving Washington Nationals.

But the more important long-term question may be that of Wilpon’s ownership itself. In my analysis, it appears that deal was soured because Wilpon could not bear to have to part with his Mets. But his continued ownership may not be good for Mets fans, who have not had much to enjoy in the last several years. To his credit, Wilpon knows it hasn’t been a good few years — he went so far as to call himself “Some schmuck in New York,” in a piece of endearing self-deprecation — but Einhorn might be a smarter owner of the Mets than Wilpon has been. As of now, Mets fans will not get the chance to find out.