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Wednesday, August 23, 2006
 
Hollywood Talent Firm Consolidates Sports Agent Biz

SFX, Octagon and IMG, collectively, once dominated the player representation business. Consolidation in the sports agency industry involving these companies, which began in 1995, dramatically changed the sports agent market and transformed the industry from a "mom and pop" environment into the world of big business in which few independent sports agents remain prominent today. [However, one independent agent, Scott Boras, continues to flourish in the baseball industry and is arguably the most dominant agent in any single sport. In 2005, Boras virtually controlled the free-agent market in baseball by signing six premium free agents to more than $400 million worth of deals.]

This year, the agent business was consolidated even further with Creative Artists Agency’s decision to buy and merge the practices of former IMG football agents Tom Condon and Ken Kremer and former SFX football agents Ben Dogra and Jim Steiner. In an instant, the merger created the largest NFL player representation firm in the country, with about 140 players, including stars such as Shaun Alexander, Peyton and Eli Manning, and Carnell “Cadillac” Williams. CAA, a Hollywood talent firm, also purchased IMG's baseball practice lead by Casey Close.

When a company purchases a sports agent business, what is it really buying? The primary assets consist of the player-agent representation agreements. But the players association regulations governing agents in all four sports permit the players to terminate these agreements at will upon just a few days notice. And players frequently switch agents, so there is a risk that some of the agency's clients will not even be the agency's clients at some point or another after the sale. So in essence, the buyer is really just purchasing the future commissions owed by the player to the agents under these agreements. [The regulations only permit commissions to be paid to the agent as and when the player is paid his salary during the term of his player contract.]

The other primary asset purchased consists of the individual agents themselves via an employment agreement with the agent. But here too, it is very common for disputes to arise between individual agents and the agency that employs them, and the agent ends up leaving and takes clients with him resulting in a lawsuit. In the July 31 edition of the Sports Business Journal, Liz Mullen notes that many agents are speculating how long the marriage will last at CAA:
No sooner was the deal announced than other agents started saying it would never work. They reasoned that egos would clash, that players might shy away from being represented by what one agent called “a monstrosity,” and that Condon, long recognized as the most powerful NFL agent, and Dogra, an up-and-comer, would struggle over issues such as who would recruit which players. Arn Tellem, the prominent basketball and baseball agent who was formerly CEO of SFX Sports and is now CEO of athlete management for Wasserman Media Group, said that the most successful agents are extremely competitive and have a hard time working with their former competitors. “It is not in most agents’ nature to make it work,” Tellem said.
Another legal issue that arises from consolidation in the industry is the increased potential for conflicts of interest. Such a conflict can arise when an agency represents two or more similarly situated players at the same time who are competing for a finite number of available positions in the league, or, even if not competing for the same position, competing for a pool of available dollars that teams are willing to spend on players at that particular time. Representing over 140 NFL clients means that CAA is representing an average of 5 players per team. At some point, CAA will be negotiating contracts at the same time for multiple free agents competing for a job. An agent owes a fiduciary duty (duty of loyalty) to serve the best interest of each individual client, and it will be difficult for CAA to do so in this scenario. The NFLPA will be closely monitoring this situation.





6 Comments:

A great book on issues within the industry is: The Business of Sports Agents by Kenneth L. Shropshire and Timothy Davis.

A note on what the buyer is acquiring, in addition to the present value of the expected future cash flows they are also paying for synergy. If it’s a good business move and the execs did their job, the value of firm AB (arising when firm A buys firm B) isn’t simply the sum of the two firms. Presumably the firm can now lay off employs (such as secretaries) and benefit more from economies of scale on supplies.

However, as your post points out, these values may not exist if agents are now upset and less productive, and clients shun away.

Anonymous George -- 8/23/2006 6:40 PM  


Exellent post. It should be interesting to see if other big time 'Hollywood' agencies other than CAA and WMG get in the game of representing athletes.

-Darren
http://www.sportsagentblog.com

Anonymous Darren -- 8/24/2006 1:34 AM  


George,

I am aware of the book and it's a good one. You raise a good point. I'm not sure what the economies of scale would be here, if there are any. But as far as synergies, CAA is marketing this as a way for athletes to take advantage of CAA's Hollywood connections in film and t.v. But there is a finite number of professional athletes that are even capable of making money in that industry, so, while it sounds good, it's probably not very realistic.

Blogger Rick Karcher -- 8/24/2006 10:24 AM  


Great post, RK! Frankly, deep down everyone knows this will never work (i.e., the CAA merger) in the long run. I give it one year before it begins to fall apart. Sports agent Egos are too big, too independent, too competitive to be departmentalized by a large organization. Trust me.

Anonymous Anonymous -- 8/24/2006 11:40 AM  


Rick - Your post is right on -- what is the buyer getting in the purchase of any service company? Similar to a law firm or accounting firm merger/acquisition, the value of a sports agency is subject to the whims of its clients. And they can leave at any time. So the purchase price takes this into account and, most importantly, the reported purchase price is usually a number based on an earn out contingency. (For this reason, I never believe the reported purchase price). So if the clients stick around and if the sports agencts perform as hoped and expected, they may see the full amount of the reported purchase price - in a few years.

Personally, I think this consolidation wave leads to fertile ground for the little guys to get back in the agency game. It is inevitable that large agencies lose the personal touch athletes and entertainers are looking for and it is inevitable that agents acting within the confines of a large entity lose the incentive and desire to provide that level of attention.

Owen Seitel
Idell & Seitel, LLP
San Francisco, California
oseitel@idellseitel.com

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