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Is Steve Ballmer overpaying for the LA Clippers?

Former Microsoft Corp. (MSFT) Chief Executive Steve Ballmer's $2 billion bid for the LA Clippers is higher than some sports economists say the franchise is worth.

Vanderbilt University Professor John Vrooman expected the team to fetch between $1.2 billion and $1.6 billion. Victor Matheson of the College of the Holy Cross told CBS MoneyWatch that he guessed the Clippers were worth "maybe $900 million" and was surprised by amount of Ballmer's bid.

Western Kentucky University's Brian Goff argued that Ballmer's $2 billion offer seems "very high," especially given that league powerhouses -- the New York Knicks and Los Angeles Lakers -- both are valued by Forbes at less than $1.4 billion.

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These experts note, however, that buying a sports team isn't a typical investment. Rich people often want to own a pro team for reasons other than the profit potential. "For them it's like owning a Van Gogh painting," said Matheson. "These are toys that billionaires buy to show off to their billionaire friends."

And Ballmer isn't a typical investor. He is reportedly a rabid basketball fan. Plus, mere months ago, he gave up the top post at one of the world's largest companies. He has likely spent time recently on the prowl for a new focus for his famously outsized energies.

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Vrooman, a distinguished professor of economics, told MoneyWatch: "This is still risky business, and risky cash flows are not worth as much as certain cash flows, but about $1.6 billion of the price is sustainable investment and the extra $400 million may be what a billionaire owner (with a Harvard degree in economics) "simply wants to pay for his NBA 'jones.'"

According to Goff, also a university professor, the Clippers earn about $130 million in revenue annually. Experts weren't sure about the team's profitability, though Matheson suspects that the team does make money.

NBA teams earn roughly half the revenue of Major League Baseball teams and about double the sales generated by National Hockey League teams. The National Football league is by far the most profitable and popular of the professional sports.

Ballmer can certainly make a difference for the Clippers, which as Vrooman notes, earn a paltry $20 million for broadcast rights. However, he has to avoid the pitfalls that many owners face in letting their passion for the sport cloud their business judgment.

"The revenue side usually takes care of itself, but the soft salary cap and hard luxury tax are tough to maneuver, and player roster composition has humbled even the best businessmen as NBA owners," Vrooman noted in an email. "The Brooklyn Nets new ownership, for example, has the league's highest payroll at about $100 million, but they will probably have to pay a luxury tax equal to that amount next season. That cuts into the positive cash flow big-time, and a club can squander its revenue advantage in one season."

Ballmer's bid isn't expected to encounter opposition from the NBA, which is eager to extricate the team from the clutches of Donald Sterling, whose secretly recorded racist rant lead to his lifetime banishment from the league and the NBA's requirement that he sell the team.

Jonathan Berr

Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.

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