This Is Not a Game
Top sports agents share their negotiating secrets.
Alix Stuart, CFO Magazine
January 1, 2006
From the sidelines, professional athletes have leverage that corporate negotiators can only dream of. Endowed with unmatchable skills and advised by top agents, stars like Alex Rodriguez, LeBron James, and Maria Sharapova can just name their price, threaten to walk, and receive untold riches, right?
Not quite. For anyone who has followed the saga of Terrell Owens, All-Pro wide receiver for the Philadelphia Eagles, it's clear that even a star needs to play by certain rules. When Owens's agent, Drew "The Shark" Rosenhaus, fumbled an attempt to secure a better contract for him, Owens vented his displeasure by insulting his teammates and was effectively terminated.
While Owens's situation is an extreme example of how aggressiveness can backfire, other top agents say they are just as restricted by basic negotiation principles as the next guy. "There has to be some resolute willingness to push the envelope," says sports agent Leigh Steinberg, head of Leigh Steinberg Enterprises and the inspiration for the character Jerry Maguire in the 1996 movie of the same name, but "you need to remember that all humans have ego and pride, so the key is to try and avoid confrontation."
Can the intricacies of sports negotiation offer any lessons for finance executives? Sure, signing All-Star pitcher Roger Clemens to another year is much more glamorous than brokering a better compensation package, selling off a business, or quelling employee dissatisfaction. But the similarities outweigh the differences. Deal-making in the corporate world involves "the same dynamics" as negotiating sports contracts, says Peter Carfagna, who oversaw contracts for the likes of Tiger Woods while he was chief legal officer at International Management Group and now teaches negotiation strategy at Case Western Reserve University. Even when you have a good deal of leverage, he adds, "you have to use it selectively, so you develop a reputation for being reasonable."
Make a List, Check It Twice
The first step, say many agents, is to catalog what you want. The longer and more varied your wish list, the better. "You should itemize a whole litany of requests, which become bargaining chips," says Bill Duffy, agent for National Basketball Association stars like Yao Ming and Drew Gooden. That strategy essentially means padding your must-haves with nice-to-haves and not disclosing which are which. "You may have things that you're willing to throw away, but your opponent doesn't know that," says Duffy.
Knowing the priorities ahead of time makes it easier to concentrate on the things that matter most to your client, says Lon S. Babby, agent for the NBA's Grant Hill and Ray Allen. He gives clients a list and asks them to rank about 15 criteria, from salaries and incentives to state income-tax considerations. Such lists are just as critical in corporate deals, although they may not appear until the later stages of a negotiation. "A lot of people think it's just about price, but it's often more subtle," says Peter Falvey, managing director at Revolution Partners, a Boston-based investment bank. In his experience, concerns like liquidity and employee provisions often take precedence.
The question then becomes whether to tackle the most or least important issue first — and how transparent to make the ranking. Carfagna says that while at IMG he used an "inside-out strategy," starting with the most-important issues, "because I wanted to know if we had a deal before getting to the peripheral issues." In the corporate world, some deal-makers, like John J. Leahy, CFO of Boston-based technology consultancy Keane Inc., believe in dealing with the low-hanging fruit first. "The more things you can agree to, the more psychological momentum you get, and the further along you are to getting the deal done," he says.
In most corporate deals, a letter of intent spells out core terms like price and time frame, so there is a defined starting point. Finance chiefs say that makes the process more efficient. Duffy, on the other hand, prefers to have the other side make the first offer, because "you certainly wouldn't want to underbid." Either way, the key to a successful deal is to engineer the back-and-forth so that "you get what you want, but you have the other side offer it," says Babby.
Head Games Once you know what you want, the next step is to "inhabit the reality" of the person with whom you are negotiating, says Steinberg. "You've got to understand what the pressures are on that person," he adds. His first step is to research the negotiation history of a team's general manager, running through questions like: Is this someone who will make a first offer and stick with it, or does he play a high-low negotiation game? Is this someone who has real authority, or will he need to run the deal by his boss?
Such due diligence, as CFOs would call it, is much like that advocated by negotiation guru Roger Fisher in his landmark book Getting to Yes, and it recently helped Steinberg land a giant salary for Pittsburgh Steelers quarterback Ben Roethlisberger. When Steinberg negotiated the first-round draft pick's initial contract with the Steelers in 2004, he knew the team was "philosophically opposed" to clauses known as escalators — incentives that enhance base salary in a deal's latter years. For his part, though, Roethlisberger wanted the opportunity to earn more for performance and to keep pace with other quarterbacks over time.
So Steinberg did some creative term-setting, and in the end Roethlisberger agreed to take the lowest possible base salary in his starting year in exchange for a $9 million signing bonus and a six-year contract filled with incentives based on playing time that could make it worth as much as $40 million over that time. "Had we insisted on an escalator, he might still be holding out," says Steinberg.
On the corporate side, Keane CFO Leahy has recognized that one of his first steps in deals with privately held, owner-run companies is to get sellers "past the emotional hurdle" of letting go. Since sellers are typically concerned with the fate of their customers and employees, Leahy says that he tries to make the case that merging with Keane will be best for all involved. Without promising too much, he tries to get owners comfortable with "the role current employees will play in the combined company, or demonstrate the type of investments we're willing to make."
Perception Is Reality
Of course, what both sides want ultimately ends up second to what the market will bear. Consequently, in sports negotiations — as in many CEO and CFO compensation contracts — a major component of external due diligence is a peer review. That often means making a case that a particular athlete exceeds the competition — as the agent defines it. "The question in these negotiations is often whose definition of performance and value will prevail," says Steinberg.
Setting such terms is especially important when marketing somewhat damaged goods. Last season, Tom O'Connell, head of Tampa-based Legends Management Group, represented a minor-league third baseman who was struggling after a "tremendous" previous season. By isolating the source of his poor performance — a switch to the American League after seven years in the National League — O'Connell could then go back to some of the National League teams that had courted him to "rekindle the fire." And in the end, O'Connell secured a deal in a more familiar environment; one that he believes offers the player a greater opportunity to make the majors. The trick, says O'Connell, is selling potential: "It's very easy to ride a thoroughbred, but Seabiscuit is a whole different animal," he explains.
Similarly, the jockeying Guidant recently did to rejuvenate its acquisition by Johnson & Johnson is a case study in emphasizing potential. When Guidant announced last fall that some of its pacemakers and defibrillators had been recalled, J&J tried to renege on its $25 billion offer, on the grounds that conditions had materially changed. Rather than rolling over and playing dead, however, Guidant filed a lawsuit against J&J for breach of contract, maintaining that its share price was still strong and that it would soon have the lawsuits behind it. Ultimately, the two parties agreed on a discounted price — about 15 percent below the original offer. (At press time, however, another suitor — Boston Scientific Corp. — had trumped the J&J bid for Guidant and the deal was uncertain.)
Some agents have struck gold for their clients by thinking outside the peer group. That was how former tennis player Anna Kournikova earned a reported $20 million in endorsements in 1999, more than any other female tennis player, even though she was hardly a top-ranked player. "We posited that the marketplace for Anna Kournikova was not the tennis marketplace, but the celebrity and entertainment marketplace," says Kournikova's agent at the time, Octagon's Phil de Picciotto. "Essentially the argument is, 'Yes, you're paying more than you ever thought you would. But we're going to deliver more than you could ever imagine.'"
Executive-compensation consultants are hard-pressed to name a CFO with that kind of star power, but there are ways to stand apart. "Some CFOs are more valuable than others, either because they have depth in a certain area of finance expertise or breadth in areas beyond finance," says Jan Koors, managing director of Pearl Meyer & Partners. One advantage enjoyed by those in the business world is that, unlike athletes, executives typically enhance their skills with age. An athlete, says Babby, may be "the nicest guy in the city, but if he can't play anymore, it's a cold business."
Resolve and Patience
Many athletes get the best deals when they have alternatives. That's why free agency, or being able to field offers from multiple teams, is so often at the heart of the deal in professional sports.
That fact was perfectly illustrated by Ray Allen's most recent negotiations with the Seattle SuperSonics, says Babby. The agent started by approaching the team a year ahead of the contract expiration to offer it first dibs on "a franchise icon," but found the team unwilling to pay. Not until a year later did the team re-sign Allen at the salary he wanted — after his contract expired and he had other offers. "We saw the market one way, they saw it another way, and ultimately we couldn't get it resolved until [Allen] could go out and prove his value," the agent says.
Still, for the ultimate alternative — walking away — to work, says Carfagna, "you have to be willing to make good on your threat." Such resolve is probably why the Minnesota Vikings' Bryant McKinnie eventually got a better deal than the team wanted to give. The seventh draft pick in 2002 asked to be paid more than the player ranked behind him, but the team refused to meet that condition. In response, McKinnie held out eight weeks into the regular season, losing out on any salary he would have been paid if he had been signed in a timely fashion. Finally, as the November 1 deadline by which Minnesota had to sign or lose him drew near, the team owners caved and paid McKinnie for a full five years, despite the half season he'd missed. "He was able to resist the temptation of signing an inferior deal," says McKinnie's agent, SFX Sports Group's Jim Steiner.
When such strong-arm tactics would be counterproductive, agents say that relying on performance-based contingencies — and patience — can be the best way to get a deal done. When the San Francisco 49ers released Jerry Rice in 2001 at age 39, for example, Steiner, his agent, admits that "we had only a certain amount of leverage, because there were only two teams interested, [the Oakland Raiders and the Detroit Lions,] and Detroit was willing to go only so far." In that case, he and Rice accepted a relatively low seven-figure salary, and then renegotiated for a better deal after Rice exceeded expectations and went to the Pro Bowl.
Similarly, earnout structures used in deals when an unproven product is at stake can reward future value. Murraysville, Pennsylvania-based medical-device maker Respironics Inc., for example, agreed to buy a product line from SpectRx Inc. back in 2003 for $5 million in cash and an additional $6.25 million over the next two years, contingent on the business's performance. In November, SpectRx got the last of its checks from the buyer, ending up with a grand total of $9.5 million for the product line. Says CFO Dan Bevevino: Earnouts are "a good way to bridge any difference in valuation perspectives," while ensuring that the buyer pays only for what it gets.
In all negotiations, however, sports agents agree that the tenor must be professional, courteous, and ethical. As soft as it sounds, many agents say building good relationships is what is most critical to getting the best deals. "It's a small world, and what goes around comes around," says Duffy.
Such an attitude paid off in spades for agent Mark Bartelstein when client Darius Songaila's contract with the Sacramento Kings came up for renewal last year. Bartelstein could have secured a release by working up a three-year deal with another NBA team that the Kings could not have matched, but Songaila's preference was an offer the Kings easily could have topped — a shorter contract from the Chicago Bulls.
So, with nothing to offer, Bartelstein went to the King's operating chief, whom he considers a friend, and asked for a favor. "I went to Geoff[Petrie] and said, 'Would you do the right thing for Darius?'" Bartelstein recalls, at which point Petrie backed off the negotiations. Bartelstein believes the implicit agreement was that he would remember the goodwill in the future when it came to marketing the Kings to clients. "He knows I'm not going to forget he did something for me," says Bartelstein.
The ultimate prize for a CFO in any negotiation, however, may be the personal satisfaction that comes from a battle well fought, regardless of the final terms. If a CFO won't argue for what he really wants, says Steinberg, he will be consigned to "that great mass of people who walk through life with a terrible roiling sense in their gut, feeling underappreciated and trod on." And, of course, if you can show shareholders the money, you may just feel like a star.
Alix Nyberg Stuart is senior writer at CFO.