Paul Articulates – Big Money Ball

Mets fans across the board have enthusiastically cheered Steve Cohen as he spends big bucks to attract some of the best talent available in free agency to build a winning team.  For those that have looked closer, he has also spent quite a bit on building up the rest of the operation with investments in state-of-the-art facilities for pitcher development and significant expansion of the analytics department.  Those on the outside may be resentful or envious of his ability to spend on making the best team – including creation of the “Cohen tax” moniker on the highest tier of the luxury tax on club payroll.

Personally, I admire what he is doing.  He has combined the talent of a successful businessman with the passion of a serious Mets fan and is now taking it to the next level.  We understand the fans’ perspective – but let’s think about the business side.  In October 2020, Steve Cohen bought the Mets for roughly $2.4B.  That is a pretty sizable investment.  To achieve a return on that big investment, you must grow revenue and build value.  Thriftiness is not a virtue in that scenario, so Mr. C is doing the right thing by spending big – growing a sustainable winning team with big names and a solid player development process.  

Forbes Magazine just released its latest evaluation of MLB teams, titled “The Business of Baseball”.  In that release, they valued the Mets’ franchise at $2.65B – already an 8% increase in the club since it was purchased.  That is good, but it could have been better.  The cross-town Yankees increased their value by 14%.  Additionally, the Mets had a $96M operating loss.  The remedy for an operating loss is to put butts in seats and to sell merchandise.   A winning team and big stars like deGrom, Scherzer, and Lindoor will achieve that objective.  A winning team year after year will build the value like you see with the Yankees, Dodgers, and Red Sox franchises who topped the list.

When Steve Cohen was asked about whether he would spend above the new luxury tax fourth tier threshold of $290M, he said, “We may have to”.  That would imply an 80% tax on every dollar committed to salaries on the Mets’ 40-man roster above $290M – in addition to the 62.5% tax being paid on the money between $270M and $290M.  Some folks can’t imagine how or why one would spend that kind of money, but let’s simplify the math to show how our owner is thinking.  Imagine the scenario where we have to bring in players that will be paid $295M in salary for 2022.  That means that in addition to the $295M in salaries, the Mets would have to pay the league luxury tax amounts of $26.9M.

20% of the amount between first threshold $230M and second threshold $250M = $4M

32% of the amount between second threshold $250M and third threshold $270M= $6.4M

62.5% of the amount between third threshold $270M and fourth threshold $290M = $12.5M

80% of the amount above the fourth threshold $290M = $4M

So if the Mets can achieve the kind of revenue as the Yankees ($482M vs $302M in 2021), they will return $180M per year for that $26.9M luxury tax.  That is not all - if the franchise valuation went up 14% instead of 8% next year, wealth grows another $159M.  That is a 1160% ROI in a single year, and it compounds year after year.  

So the moral of this story is that Steve Cohen spends to win and wins by spending.  Mets fans benefit with much better teams that can compete with the best in baseball year after year.  What a great outcome for a fan base that has suffered through mediocrity for 60 years.