Givers

A long long time ago, in a place not to far but still far away, there lived a gentlemen named Mr A. Mr A was the proud owner of a vast piece of barren land. He reared his flock of sheep on this land. The sun shone harshly upon his land, but the moon brought some relief when it rose. There was not enough water to cultivate the land, hence it was predominantly barren apart from a few sparse shrubs. Mr A was content, life was peaceful.

Due to changing economic cycles, Mr A lost money in his other ventures and needed to sell his sheep and land. He easily sold his sheep to a wandering shepherd for a fair price. His barren land however, proved more difficult to sell. He struggled and searched for a suitable buyer, but none offered a fair price for the land. Eventually Mr A met Mr B, an honest and respected gentlemen. Mr B offered a good price for the land and a deal was struck.

Mr. B wanted to use this land to cultivate crops on this land. He realized before buying the land that there was not sufficient water available. He knelt down in prayers and asked the Lord for help. After completing his prayers, he asked his workers to dig at that spot. Hoping for water, his workers find an old chest buried in the ground. Mr B discovers that this chest contains gold.

He immediately goes to Mr. A and says, "I found this chest of gold on your land, and I have come to return it". Mr A is stunned, he never owned a chest of gold. He mulled over the situation for a few seconds, he needed the money, but the gold was not his. Mr A replies in a stoic voice, "The gold does not belong to me, you bought the land and you found it, its yours." Undeterred Mr. B replies," I bought the land, not whats beneath it, please accept the gold." Mr A exclaims, "You bought the land and everything that came with it".
Neither one was willing to keep the gold.

I do not know how the story ends, but I think the message is already evident.

Valuing Ronaldo

The deal has finally been completed. Ronaldo's dream of playing for Real Madrid will finally come true, albeit at a great cost. Real Madrid did not flinch to shell out £80m. The press went crazy, experts gave their two bits, fact sheets were reprinted and the whole circus played out. Obviously Ronaldo made a few wiseacre, 'Im the best' comments to add to the hysteria.

I have often wondered how these clubs assign a value to a player. It is obvious that some players perform better than others, but how much are they really worth. Basic finance has taught me, that the value of an asset is equal to the amount of cash it can generate in the future discounted to its present value.

Lets list the cash flows Ronaldo will generate for Real Madrid.

1. T-shirt sales: At the moment he is arguably the most popular player on the planet (almost in the league of Beckham).
2. T.V. rights: Clubs in Spain negotiate T.V. rights individually. Ronaldo's popularity will give Real more bargaining power.
3. Endorsements: Ronaldo will definitely attract big brands to Madrid.
4. Stadium Receipts: The best players attract larger viewers to the game.
5. Buzz: This is not exactly tangible. But Ronaldo has a habit of shocking. check this (stupid but catches media attention)

I was wondering if you could use some multiples to arrive at a value. Here are some i could think of:

1. Player Value / T-shirts sold
2. Player Value / Goals scored
3. Player Value / Assists
4. Player Value / (Wins/Games started)

I still think its more art than science. Not really sure if the managers actually care about valuations but the finance guys at the clubs surely would.