Given how popular and seemingly larger-than-life most professional sports franchises are, we sometimes forget that these entities are still “companies” looking to make the most prudent business decisions available to them. While there is often more money involved, your favorite sports team operates under the same principles that your business does. As a finance major, my professors often say that when analyzing investments, it’s best not to just seek out the highest possible return, but the highest risk-adjusted return.
How does this simple finance fundamental apply to Carlos Correa’s negotiations with a handful of MLB teams this offseason? Well, it explains why the former Rookie of the Year, All-Star, and World Series-winning shortstop went from being a Giant to a Met to a Twin over the course of about a month.
After superstars like Aaron Judge, Jacob deGrom, Justin Verlander, Trea Turner, and Xander Bogaerts all signed massive free agent contracts earlier this offseason, all signs pointed to Carlos Correa having a robust market being the last major impact player left on the board. That notion was initially validated when Correa agreed to a 13-year contract worth $350 million with the San Francisco Giants, one of the biggest deals in MLB history.
However, on December 20th, Correa’s introductory press conference in San Francisco was postponed due to a holdup with his physical stemming from an injury Correa suffered before even debuting in the majors. Within a matter of hours, the Mets swooped in and offered 12 years and $315 million to Correa, which he quickly accepted. Before anything was official, Mets owner Steve Cohen claimed that the acquisition “puts us over the top.”
You might be asking: what did the Giants see in Correa’s physical that the Mets didn’t? Well, the answer came on Christmas Eve when reports surfaced that the Mets did in fact have similar concerns. Cohen’s comments came before any Mets doctor was able to examine Correa. This led to nearly three weeks of back and forth between Correa, Scott Boras (Correa’s agent), the Mets, and eventually, the Twins.
Why did this process take so long? It’s because when hundreds of millions of dollars are at stake, things can get extremely complex. And that they did.
When teams sign players to long-term contracts like Correa’s, they often acquire insurance to protect themselves if the player is unable to play due to an injury. However, these insurance policies contain exclusions regarding previous and or existing injuries (i.e. Correa’s ankle injury) that might wreak havoc on the player’s long-term health. For most free agents who sign shorter-term deals, this isn’t an issue. But when you’re talking about a deal spanning over a decade, teams want to protect themselves against risk as much as possible.
If insurance won’t protect the teams, what can? In contrast to the NFL, most MLB free agent contracts are fully guaranteed. Once signed, a player is entitled to all the money that was agreed upon. Yes, there are usually performance bonuses that sometimes include playing time elements, but for the most part, star players like Correa usually have the leverage to secure a lot of guaranteed cash. However, as the last month has told us, sometimes it can get tricky.
A recent example of this came in 2018 when J.D. Martinez signed with the Boston Red Sox. Coming off a monster 2017 season, Martinez was in line to cash in on a big-time deal. However, concerns over a foot injury he suffered early in the season somewhat hampered his market. Martinez still netted a nine-figure deal from Boston, but not without some drawbacks.
The Red Sox, led by GM Dave Dombrowski at the time, negotiated their own means of walking away from the final two years of the contract in the event that Martinez’s foot proved to be a chronic condition.
According to the contract, had Martinez spent 60 consecutive days on the injured list in the third year of the contract with an injury related to his prior foot injury, the fourth year could’ve been converted into a mutual option. Boston could’ve also converted the fourth year to a mutual option had Martinez missed 120 days between the second and third years of the deal pertaining to the prior Lisfranc issue.
As it turned out, none of this came to pass as Martinez played out his Boston deal without any foot concerns. But from this, you can definitely see the detail and implications involved in these types of negotiations.
That’s why the Correa situation took so long. You can bet lawyers from the Mets and Twins worked around the clock to try and include the most advantageous contract language possible to protect against the long-term risk of taking on Correa. Concurrently, Boras Corp sought to maximize the guarantees in the contract.
What it likely came down to in the end goes back to a simple principle any finance major learns in school: The deal that was ultimately agreed upon offered the highest risk-adjusted return for both Correa’s camp and the Twins. Ultimately, the Twins were willing to offer more in guarantees and Correa saw fit to accept the deal. He can earn up to $270 million if he is able to stay healthy over the length of the contract, so he’ll be just fine despite not securing quite the bag he thought he would in San Francisco.
Just like every company wants to mitigate risk and every investor seeks the highest risk-adjusted return, teams and players seek to do the same when it comes to the business and law of sports. Some may overlook this aspect of sports, but all of us at Conduct Detrimental, we’re fascinated by it!
Brendan can be found on Twitter @_bbell5
